e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PyYlo6YpBP6ukSLlR5V2aUU+uI6ufAXKyVMb37h+6WNRBoSqlVDupkMD4/mUYFr0 qEwoeYWRkj6Lp6hhxEVnAw== 0000891618-05-000847.txt : 20051109 0000891618-05-000847.hdr.sgml : 20051109 20051109172644 ACCESSION NUMBER: 0000891618-05-000847 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON IMAGE INC CENTRAL INDEX KEY: 0001003214 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 770396307 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26887 FILM NUMBER: 051191184 BUSINESS ADDRESS: STREET 1: 1060 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94085 BUSINESS PHONE: 4086164000 MAIL ADDRESS: STREET 1: 1060 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94085 10-Q 1 f13427e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2005


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

For the transition period from to .

Commission file number: 000-26887

Silicon Image, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		77-0396307 (I.R.S. Employer Identification No.)

1060 East Arques Avenue
Sunnyvale, California 94085
(Address of principal executive offices and zip code)

(408) 616-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days Yes R No £

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes R No £

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

The number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of October 31, 2005 was 80,372,185 shares.

Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three and Nine Months Ended
September 30, 2005

Table of Contents


Part I Financial Information (Unaudited)
Item 1 Financial Statements			3
Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004			3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004			5
Notes to Condensed Consolidated Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3 Quantitative and Qualitative Disclosures About Market Risk			42
Item 4 Controls and Procedures			43
Part II Other Information
Item 1 Legal Proceedings			43
Item 2 Change in Securities and Use of Proceeds			45
Item 3 Defaults Upon Senior Securities			45
Item 4 Submission of Matters to a Vote of Security Holders			45
Item 5 Other Information			45
Item 6 Exhibits			46
Signatures			47
Certifications
EXHIBIT 10.02
EXHIBIT 10.03
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

Part I. Financial Information

Item 1. Financial Statements

Silicon Image, Inc.

Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)


	September 30,			December 31,
	2005			2004
Assets
Current Assets:
Cash and cash equivalents	$	28,659		$	23,280
Short-term investments		105,459			70,240
Accounts receivable, net of allowances for doubtful accounts of $939 at September 30 and $745 at December 31		27,653			19,417
Inventories		13,436			13,926
Prepaid expenses and other current assets		3,284			3,073

Total current assets		178,491			129,936

Property and equipment, net		9,494			9,494
Goodwill		13,021			13,021
Intangible assets, net		860			1,683
Other assets (Notes 6 and 9)		7,588			774

Total assets	$	209,454		$	154,908

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	12,976		$	6,833
Accrued liabilities		11,575			13,418
Deferred license revenue		4,704			2,127
Debt obligations and capital leases		364			489
Deferred margin on sales to distributors		11,230			9,962

Current liabilities		40,849			32,829

Other long term liabilities (Note 9)		6,811			—

Total liabilities		47,660			32,829

Commitments and contingencies (Note 9)
Stockholders’ Equity:
Common stock, par value $0.001; shares authorized: 150,000,000;
shares issued and outstanding: 80,310,859 — September 30, 2005 and 78,131,604 — December 31, 2004		80			78
Additional paid-in capital		305,217			299,744
Unearned stock compensation		(7,066	)		(7,632	)
Accumulated deficit		(135,982	)		(172,978	)
Accumulated other comprehensive income (loss)		(455	)		2,867

Total stockholders’ equity		161,794			122,079

Total liabilities and stockholders’ equity	$	209,454		$	154,908

See accompanying Notes to Condensed Consolidated Financial Statements.

Silicon Image, Inc.

Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenue:
Product	$	50,443		$	41,474		$	138,574		$	110,350
Development, licensing and royalties		5,559			6,394			12,469			16,737

Total revenue		56,002			47,868			151,043			127,087

Cost and operating expenses:
Cost of revenue (1)		20,868			18,204			57,360			50,414
Research and development (2)		12,309			12,180			32,334			45,223
Selling, general and administrative (3)		7,754			9,028			20,580			31,009
Amortization of intangible assets		274			357			822			1,070

Total cost and operating expenses		41,205			39,769			111,096			127,716

Income (loss) from operations		14,797			8,099			39,947			(629	)
Interest income and other, net		908			211			2,167			399
Gain (loss) on investment security		—			(64	)		1,263			926

Income before provision for income taxes		15,705			8,246			43,377			696
Provision for taxes		5,802			369			6,380			941

Net income (loss)	$	9,903		$	7,877		$	36,997		$	(245	)

Net income (loss) per share:
Net income (loss) per share — basic	$	0.12		$	0.11		$	0.47		$	0.00

Net income (loss) per share — diluted	$	0.11		$	0.09		$	0.42		$	0.00

Weighted average shares — basic		79,736			74,976			79,077			73,797
Weighted average shares — diluted		86,869			85,890			87,081			73,797

(1) Includes stock compensation expense (benefit)	$	(252	)	$	(110	)	$	(1,408	)	$	1,890
(2) Includes stock compensation expense (benefit)		(655	)		595			(4,346	)		11,584
(3) Includes stock compensation expense (benefit)		(540	)		1,042			(3,719	)		9,253

See accompanying Notes to Condensed Consolidated Financial Statements.

Silicon Image, Inc.

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	36,997		$	(245	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation		4,611			3,631
Amortization of intangible assets		823			1,070
Provision for doubtful accounts receivable		194			75
Stock compensation expense (benefit)		(9,473	)		22,727
Increase in additional paid in capital related to income tax provision (Note 11)		5,322			—
Gain on investment security		(1,263	)		(926	)
Realized loss on investments		45			—
Changes in assets and liabilities:
Accounts receivable		(8,430	)		(9,623	)
Inventories		490			(3,726	)
Prepaid expenses and other assets		(214	)		960
Accounts payable		6,143			5,410
Accrued liabilities and deferred license revenue		734			3,441
Deferred margin on sales to distributors		1,268			5,154

Cash provided by operating activities		37,247			27,948

Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments		57,193			21,807
Purchases of short-term investments		(94,560	)		(20,641	)
Net purchases of property and equipment		(4,612	)		(4,782	)

Cash used in investing activities		(41,979	)		(3,616	)

Cash flows from financing activities:
Proceeds from issuances of common stock, net		10,236			15,531
Repayments of capital lease and debt obligations		(125	)		(1,414	)

Cash provided by financing activities		10,111			14,117

Net increase in cash and cash equivalents		5,379			38,449
Cash and cash equivalents — beginning of period		23,280			24,059

Cash and cash equivalents — end of period	$	28,659		$	62,508


Supplemental cash flow information:
Cash payment for income taxes	$	306		$	262

Supplemental non-cash investing and financing activities:
Unrealized gain on investment security, net of tax	$	—		$	4,173


Increase in restricted cash and related long-term liability associated with ongoing litigation (Notes 6 and 9)	$	6,811		$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

Silicon Image, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2005

(unaudited)

1. Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Silicon Image, Inc. (“Silicon Image”, “we” or “our”) included herein have been prepared on a basis consistent with our December 31, 2004 audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the consolidated financial position of Silicon Image and our subsidiaries at September 30, 2005 and the related consolidated results of operations and cash flows for the three and nine months ended September 30, 2005 and 2004. All significant intercompany accounts and transactions have been eliminated. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 31, 2004. Certain comparative amounts have been reclassified to conform with the current presentation. These reclassifications have no impact on the reported results of operations for any period presented. Results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of future operating results.

2. Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25 (“APB 25”) to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

The Company has not yet quantified the effects of the adoption of SFAS 123R, but it is expected that the new standard may result in significant stock-based compensation expense. The pro forma effects on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of original SFAS No. 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of APB 25) are disclosed in Note 3, “Stock-Based Compensation”. Although such pro forma effects of applying the original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method (as described below) chosen for adopting SFAS 123R.

SFAS 123R will be effective for the Company’s fiscal quarter beginning January 1, 2006, and requires the use of the Modified Prospective Application Method. Under this method, SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that is outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS No. 123. We are in the process of evaluating the impact of the adoption of SFAS 123R on our financial statements.

On March 29, 2005, the SEC issued SAB 107, which provides guidance on the interaction between FAS 123R, and certain SEC rules and regulations. SAB 107 provides guidance that may simplify some of FAS 123R’s implementation challenges.

In November 2004, the FASB issued SFAS No. 151 (“SFAS 151”), “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires those items to be excluded

from the cost of inventory and expensed when incurred. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for companies at the beginning of the first interim or annual period beginning after June 15, 2005. We do not believe that the adoption of SFAS 151 will have a material effect on our financial position, results of operations, or cash flows.

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Non-monetary Assets,” an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29 (“APB 29”), “Accounting for Non-monetary Transactions”, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS 153 amends APB 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and should be applied prospectively. We do not believe that the adoption of SFAS 153 will have a material effect on our financial position, results of operations, or cash flows.

In May 2005, the FASB issued SFAS No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections”, which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS 154 supersedes APB No. 20 (“APB 20”), “Accounting Changes”, which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB 20, such a change would have been reported as a change in accounting principle. SFAS 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The adoption of this standard had no impact on our financial position, results of operations, or cash flows.

3. Stock-Based Compensation

Excluding certain repricings, we account for stock-based awards to employees and directors using the intrinsic value method of accounting in accordance with APB 25. Under the intrinsic value method, if the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. As detailed below, we recognize stock compensation expense (benefit) for certain options granted to employees, options granted to non-employees, option repricings, and options assumed in connection with acquisitions.

Had we recorded compensation expense for our stock options based on the grant-date fair value as prescribed by SFAS No. 123 and SFAS No. 148, our net income (loss) would have been as follows (in thousands, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income (loss) — as reported	$	9,903		$	7,877		$	36,997		$	(245	)
Stock-based employee compensation expense (benefit) included in the determination of net income (loss) as reported, net of tax		(1,767	)		(46	)		(9,998	)		16,133
Stock-based employee compensation expense determined using fair value method, net of tax		(5,379	)		(5,639	)		(16,217	)		(16,009	)

Pro forma net income (loss)	$	2,757		$	2,192		$	10,781		$	(121	)


Net income (loss) per share — basic (as reported)	$	0.12		$	0.11		$	0.47		$	0.00
Net income (loss) per share — diluted (as reported)	$	0.11			0.09		$	0.42		$	0.00
Pro forma net income (loss) per share — basic		0.03			0.03			0.14		$	0.00
Pro forma net income (loss) per share — diluted		0.03			0.03			0.12		$	0.00

The weighted average grant-date fair value was estimated using the Black-Scholes pricing model with the following assumptions:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Expected life (years)		5			5			5			5
Interest rate		4.2	%		3.4	%		4.1	%		3.1	%
Volatility		90	%		90	%		90	%		90	%
Dividend yield		—			—			—			—
Weighted average fair value	$7.37			$	8.24		$	9.33		$	7.55

The weighted average, grant-date fair value of stock purchase rights granted under our Employee Stock Purchase Plan and the assumptions used are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Expected life (years)		1.4			1.5			1.4			1.5
Interest rate		3.2	%		1.2	%		2.9	%		1.2	%
Dividend yield		—			—			—			—
Volatility		66	%		65	%		71	%		70	%
Weighted average grant date fair value	$	4.55		$	2.88		$	4.30		$	2.69

We are required to determine the fair value of stock option grants to non-employees and to record the amount as an expense over the period during which services are provided to us. Management calculates the fair value of these stock option grants using the Black-Scholes model, which requires us to estimate the life of the stock option, the volatility of our stock, an appropriate risk-free interest rate, and our dividend yield. The calculation of fair value is highly sensitive to the expected life of the stock option and the volatility of our stock, both of which we estimate based primarily on historical experience.

The following table summarizes the components of our stock compensation expense (benefit) for the three and nine months ended September 30, 2005 and 2004 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Options granted to employees	$	4		$	855		$	260		$	906
Options granted to non-employees		625			1,454			2,249			4,220
Option repricings		(2,233	)		(1,047	)		(12,508	)		16,609
Options assumed in connection with acquisitions		157			265			526			992

Stock compensation expense (benefit)	$	(1,447	)	$	1,527		$	(9,473	)	$	22,727

In the table above, options granted to non-employees and option repricings are significantly impacted by changes in our stock prices. Increases in our stock price generally have the effect of increasing the associated expense. Decreases in our stock price have the effect of decreasing the associated expense or increasing the associated benefit.

4. Comprehensive income (loss)

The components of comprehensive income (loss), net of related taxes, were as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income (loss)	$	9,903		$	7,877		$	36,997		$	(245	)
Change in unrealized value on investments, net of tax		(198	)		(726	)		(3,322	)		3,217

Total comprehensive income	$	9,705		$	7,151		$	33,675		$	2,972

5. Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period, excluding shares subject to repurchase, and diluted net income (loss) per share is computed using the weighted-average number of common shares and diluted equivalents outstanding during the period, if any, determined using the treasury stock method. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income (loss)	$	9,903		$	7,877		$	36,997		$	(245	)


Weighted average shares		79,938			75,694			79,299			74,534
Unvested common shares subject to repurchase		(202	)		(718	)		(222	)		(737	)

Weighted average shares — basic		79,736			74,976			79,077			73,797

Weighted average shares — diluted		86,869			85,890			87,081			73,797

Net income (loss) per share — basic	$	0.12		$	0.11		$	0.47		$	(0.00	)
Net income (loss) per share — diluted	$	0.11		$	0.09		$	0.42		$	(0.00	)

Had we generated net income for the nine months ended September 30, 2004, the number of weighted average securities outstanding that would have been added to weighted average shares for purposes of calculating diluted earnings per share would have been (in thousands):


	Nine Months
	Ended
	September 30,
	2004
Unvested common stock subject to repurchase		789
Stock options		10,113

Total		10,902

As a result of our losses for the nine months ended September 30, 2004, all common share equivalents would have been anti-dilutive and have therefore been excluded from the diluted net loss per share calculation. The weighted average securities that were anti-dilutive and excluded from our calculation of diluted net loss per share were approximately 1,794,000 for the three month period ended September 30, 2004, and approximately 20,227,000 for the nine month period ended September 30, 2004.

6. Balance Sheet Components


	September 30,		December 31,
	2005		2004
	(in thousands)
Inventories:
Raw materials	$	2,356	$	3,089
Work in process		3,906		2,372
Finished goods		7,174		8,465

Total inventories	$	13,436	$	13,926


Other assets:
Restricted cash	$	6,811	$	—
Deposits		305		255
Other		472		519

Total other assets	$	7,588	$	774

In connection with an ongoing legal proceeding (described in Note 9), in July 2005 we received $6.8 million from the Federal Circuit Court. As stipulated in the court order, we deposited these funds in a segregated account and will not use these funds until the adverse party has exhausted all of its appeals. These funds were recorded as a long-term asset, identified as restricted cash, with a corresponding long-term liability. These funds will be recognized as other income once the adverse party has exhausted their appeals and the litigation is deemed final.


	September 30,		December 31,
	2005		2004
	(in thousands)
Accrued liabilities:
Accrued payroll and related expenses	$	3,907	$	3,351
Restructuring accrual		254		1,036
Accrued legal fees		616		910
Warranty accrual		355		351
Bonus accrual		1,606		3,122
Other accrued liabilities		4,837		4,648

Total accrued liabilities	$	11,575	$	13,418

At the time of revenue recognition, we provide an accrual for estimated costs to be incurred pursuant to our warranty obligation. Our estimate is based primarily on historical experience. Warranty accrual activity for the nine months ended September 30, 2005 and 2004 was as follows (in thousands):


	2005			2004
Balance at January 1	$	351		$	271
Provision for warranties issued during the period		242			200
Cash and other settlements made during the period		(238	)		(120	)

Balance at September 30	$	355		$	351

7. Asset impairment and restructuring activities

During the third quarter of 2001, we began a program to focus our business on products and technology, including those obtained through acquisitions, in which we have, or believe we can achieve, a market leadership position. As part of this program, we decided to cancel numerous products under development, to remove certain projects from our development plan, to phase out or de-emphasize certain existing products and to integrate the operations of two acquired companies—CMD Technology (“CMD”) and Silicon Communication Lab (“SCL”).

In connection with this program, during the third quarter of 2001 through the first quarter of 2003, we recorded restructuring expenses as a result of four workforce reductions by eliminating approximately 136 positions. These expenses consisted of both cash severance-related costs and non-cash severance-related costs representing the intrinsic value of modified stock options. In addition, restructuring expenses during this period were also a result of expected losses on leased facilities, fixed asset write-downs, impairment of goodwill, intangible assets and acquired technology offset in part by reversals of unearned compensation, a component of stockholders’ equity for unvested stock options that were cancelled in connection with employee terminations.

Severance and benefits payments are substantially complete. Lease payments will be made in the form of cash through the end of the related lease term of November 2005. The following table presents restructuring activity for the nine month periods ended September 30, 2005 and 2004 (in thousands):


	2005								2004
	Severance and		Leased						Severance and			Leased
	Benefits		Facilities			Total			Benefits			Facilities			Total
Balance as of January 1	$	32	$	1,004		$	1,036		$	37		$	1,838		$	1,875
Cash payments		—		(562	)		(562	)		(5	)		(569	)		(574	)
Adjustment related to lease modification		—		(220	)		(220	)		—			—			—

Balance as of September 30	$	32	$	222		$	254		$	32		$	1,269		$	1,301

In September 2005, we renegotiated a lease for a facility, which was identified in our restructuring program, that provided for an early termination. Accordingly, we recorded an adjustment of $220,000 to the restructuring accrual with an offsetting reduction to selling, general and administrative expense for the three months ended September 30, 2005 resulting from this lease modification.

8. Debt Facilities

During the three months ended March 31, 2003, we borrowed $383,000 to finance certain capital equipment. This term loan bore interest at 5% and required monthly payments through its maturity in February 2005. During the three months ended March 31, 2005, the remaining balance on this loan was repaid in full. During the period ended March 31, 2004, we entered into an agreement to extend this debt facility by way of a revolving line of credit with an availability of up to $10.0 million, and an equipment line of credit of up to $3.0 million. Borrowings under the revolving line were limited to the lesser of $10.0 million or 80% of eligible accounts receivable as defined in the loan agreement, and bore interest at either prime plus 0.25% or LIBOR plus 2.75%, at our option. This revolving line of credit expired in May 2005 and was not renewed.

In January 2005, we acquired certain capital equipment under a debt arrangement and as of September 30, 2005, the future debt obligations under this arrangement were approximately $80,000.

9. Commitments and Contingencies

Legal Proceedings

agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court, it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made certain cash payments to the Court, it has not made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On August 26, 2004, the parties completed the filing of their respective appeal briefs. After a hearing, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the lower court’s order, which was based on the parties’ agreement to settle the case, was not “final” and appealable. The case was remanded by the Federal Circuit back to the lower court. The parties have negotiated a stipulation by which the lower court can issue a new final judgment. Under this stipulation, the Court was to turn over funds deposited by Genesis to us. On July 22, 2005, Silicon Image filed a certification with the Court stating that the funds had been received by Silicon Image. On the same day, the Court issued an order dismissing Silicon Image’s lawsuit. Genesis filed a notice of appeal on August 16, 2005 and filed its opening appeal brief on October 24, 2005. Silicon Image has 40 days to file its opposition brief and Genesis will have 14 days from the filing of Silicon Image’s opposition brief to file a reply brief. After the conclusion of the briefing, the Federal Circuit will set a date for oral arguments and will notify the parties of the date.

To date, we have not received any unrestricted cash payments nor have we recognized any gain associated with the matter. If the MOU is upheld in its present form after all appeals have been exhausted the restrictions on the use of the cash payment will be lifted and additional cash amounts will be owed by Genesis to Silicon Image under the terms of the MOU. In addition, Genesis will be granted a royalty-bearing license for the right to use certain non-necessary patent claims referred to in the DVI Adopters Agreement. In addition, Genesis will be granted a royalty-bearing license for the right to use these claims as part of any HDMI implementation. Genesis will also be granted a royalty-bearing license to expand use of certain DVI- related patent claims to the consumer electronics marketplace. Through September 30, 2005, we have spent and expect to continue to incur significant legal costs until the matter is resolved.

On July 19, 2005 the Court sent $6.8 million to Silicon Image, which we have deposited in a segregated account, as required by court order, and will not use the funds until Genesis has exhausted all of its appeals. These funds were recorded as a long-term asset, identified as restricted cash, with a corresponding long-term liability. These funds will be recognized as other income once Genesis has exhausted their appeals and the litigation is deemed final.

Silicon Image, certain officers and directors, and Silicon Image’s underwriters have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et al., No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New York. The lawsuit alleges that all defendants were part of a scheme to manipulate the price of Silicon Image’s stock in the aftermarket following Silicon Image’s initial public offering in October 1999. Response to the complaint and discovery in this action on behalf of Silicon Image and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over 300 such cases brought by plaintiffs in the Southern District of New York. Pursuant to a tolling agreement, individual defendants have been dropped from the suit for the time being. In February 2003, the Court denied motions to dismiss brought by the underwriters and certain issuers and ordered that the case may proceed against certain issuers including against Silicon Image. A proposed settlement has been negotiated and has received preliminary approval by the Court. In the event that the settlement is granted final approval, we do not expect it to have a material effect on our results of operations or financial position. This settlement will not require Silicon Image to pay any settlement amounts nor issue any securities. In the event that the settlement is not finally approved, we could not accurately predict the outcome of the litigation, but we intend to defend this matter vigorously.

appointing lead plaintiffs and approving the selection of lead counsel. On July 27, 2005, plaintiffs filed an amended consolidated complaint. The amended complaint no longer names Mr. Gargus as an individual defendant, but adds David Lee as an individual defendant. In accordance with the court’s scheduling order, the defendants filed a motion to dismiss on September 26, 2005, which motion is scheduled to be heard on January 13, 2006. Silicon Image intends to defend itself vigorously in this matter.

On January 14, 2005, we received a notification that the Securities and Exchange Commission had commenced a formal, private investigation involving trading in securities of Silicon Image. We are fully cooperating with the investigation.

In addition, we have been named as defendants in a number of judicial and administrative proceedings incidental to our business and may be named again from time to time. We intend to defend such matters vigorously, and although adverse decisions or settlements may occur in one or more of such cases, the final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on our results of operations or financial position.

Guarantees

Certain of our licensing agreements indemnify our customers for any expenses or liabilities resulting from claimed infringements of third party patents, trademarks or copyrights by our products. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances, the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to any claim. However, there can be no assurance that such claims will not be filed in the future.

10. Customer and Geographic Information

Revenue by geographic area was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Taiwan	$	12,398	$	10,742	$	36,853	$	33,717
Japan		14,359		10,096		30,410		25,468
United States		14,645		14,278		41,999		35,577
Hong Kong		1,854		1,633		4,973		4,413
Korea		5,942		1,770		14,159		5,343
Other		6,804		9,349		22,649		22,569

Total revenue	$	56,002	$	47,868	$	151,043	$	127,087

Revenue by product line was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Consumer Electronics	$	34,127	$	26,987	$	82,162	$	60,519
Storage		9,707		10,408		32,744		35,936
Personal Computer		12,168		10,473		36,137		30,632

Total revenue	$	56,002	$	47,868	$	151,043	$	127,087

For the three months ended September 30, 2005, three customers each generated 15.2%, 12.2%, and 11.6% of our revenue respectively. For the nine months ended September 30, 2005, three customers each generated 17.3%, 10.9% and 10.2% of our revenue respectively. At September 30, 2005, one customer represented 15.9% of gross accounts receivable.

For the three months ended September 30, 2004, two customers each generated 15.7% and 13.1% of our revenue respectively. For the nine months ended September 30, 2004, two customers generated 13.9% and 12.3% of our revenue respectively. At September 30, 2004, three customers represented 18.2%, 12.7% and 12.2% of gross accounts receivable.

For each period presented, substantially all long-lived assets were located within the United States.

11. Provision for taxes

For the three and nine month periods ended September 30, 2005, we recorded a provision for taxes of $5.8 million and $6.4 million, respectively. The effective tax rate was 36.9% for the three months ended September 30, 2005 due to the cumulative effective of an increase in the estimate of the annual effective tax rate from 2.9% to 14.7%. The change in the annual effective tax rate resulted from an increase in the Company’s estimated annual taxable income for 2005. The estimated effective tax rate also reflects the fact that a portion of the benefit of net operating loss carryforwards resulting from stock option transactions does not reduce the tax provision but rather is recorded as a credit to additional paid-in capital. During the three months ended September 30, 2005, additional paid-in capital increased by approximately $5.3 million as a result of the benefit from such net operating losses. The effective annual tax rate of 14.7% is comprised of 12.5% Federal, 1.8% State and .4% foreign. The effective Federal tax rate of 12.5% differs from the Federal statutory tax rate of 35% primarily due to the partial release of expected benefits from the utilization of net operating loss carryforwards.

The Company provided a valuation allowance of $71.6 million as of December 31, 2004 on 100% of its net deferred tax assets as management determined it was more likely than not that the deferred tax assets would not be realized. The Company continues to assess the recoverability of the deferred tax assets on an ongoing basis. If the Company subsequently concludes that it is more likely than not that the deferred tax assets will be recovered and, accordingly, reverses the valuation allowance, management expects that the effect of the reversal will principally be a credit to additional paid-in capital for the reasons described in the previous paragraph.

12. Gain on investment security

In October 2000, as consideration for the transfer of certain technology to Leadis Technology Inc. (Leadis), a development stage privately controlled entity, we received 300,000 shares of preferred stock and a warrant to purchase 75,000 shares of Leadis’ common stock. Initially, these equity instruments were recorded at a nominal value due to the early stage of Leadis’ development and other uncertainties as to the realization of this investment.

During the quarter ended June 30, 2004, Leadis completed an initial public offering of its stock. In connection with the initial public offering, the preferred stock was converted into common stock on a 1:1 basis. As part of the original agreement, we were subject to a lock-up restriction that prevented us from selling or hedging any of the securities from our investment for a period of nine months ended December 2004. For the three and nine month periods ended September 30, 2004, we valued the warrant using the Black-Scholes model and recorded a gain of approximately $990,000.

In February 2005, we sold approximately 23,600 shares of our investment in Leadis at prices ranging from $7.40 to $7.50. These shares related to the warrant shares and consequently in connection with this sale, we recorded a loss of approximately $120,000 for the three-month period ended March 31, 2005. During the three month period ended June 30, 2005, we sold the remainder of our holding in Leadis at prices ranging from $5.38 to $6.06, and recorded a net realized gain of approximately $1.4 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-Q entitled “Factors Affecting Future Results,” that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this Form 10-Q are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will” and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC. Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by Silicon Image, Inc. in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

Overview

Silicon Image is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. Our mission is to be the leader in defining the architectures, intellectual property (IP) and semiconductor technology required to build secure digital content delivery systems. To ensure that rich digital content is always available on any device, consumer electronics (CE), personal computers (PC) and storage devices must be architected for content compatibility and interoperability.

Silicon Image’s strategy entails establishing industry-standard, high-speed digital interfaces and building market momentum and leadership through our first-to-market, standards-based integrated circuit (IC) products. We also utilize our strong intellectual property (IP) portfolio in our efforts to accelerate and broaden market adoption of the High-Definition Multimedia Interface (HDMI), Serial ATA (SATA), and Digital Visual Interface (DVI) technology interfaces by licensing our proven IP cores to other companies, providing advanced system-on-a-chip solutions incorporating these interfaces. In addition to creating revenue and return on engineering investment, we primarily license our IP in market segments we choose not to pursue with our semiconductor products, creating products complementary that expand the markets for our products and help to improve standards adoption, implementation and industry-wide interoperability.

We have leveraged our core technology and standards-setting expertise to drive the adoption of HDMI, which is becoming the digital interface standard for video applications in the consumer electronics market. Introduced in 2002, HDMI enables the distribution of uncompressed, high-definition video and multi-channel audio in a single, all-digital interface that dramatically improves quality and simplifies cabling. In addition to Silicon Image, the HDMI founders include leading consumer electronics manufacturers Hitachi Ltd. (Hitachi), Matsushita Electric Industrial Co. (MEI or Panasonic), Philips Consumer Electronics International B.V. (Philips), Sony Corporation (Sony), Thomson Multimedia, S.A. (Thomson or Thomson RCA) and Toshiba Corporation (Toshiba). Our HDMI technology is also marketed under the PanelLink(R) brand and can include High-bandwidth Digital Content Protection (HDCP), which is supported by Hollywood studios as the technology of choice for the secure distribution of premium content over uncompressed digital connections. Silicon Image shipped the first HDMI-compliant silicon to the market and currently remains the market leader for HDMI functionality.

Products sold into the CE market have been increasing as a percentage of our total revenue and generated 55.8% and 50.3% of our total revenue for the three and nine month periods ended September 30, 2005, respectively, compared to 46.5% and 39.0% of our total revenue for three and nine month periods ended September 30, 2004. Our CE products offer a secure interface for transmission of digital video and audio to consumer devices, such as digital TVs, HDTVs, A/V receivers, set top boxes (STBs), and DVD players. Demand for our products will be driven primarily by the adoption rate of the HDMI standard within these product categories.

In the storage market, Silicon Image has assumed a leadership role in SATA, a high-bandwidth, point-to-point interface that is replacing parallel ATA in desktop storage and making inroads in the enterprise arena. Silicon Image is a leading supplier of discrete SATA devices. Our SATALink(TM)-branded solutions offer advanced features and capabilities such as native command queuing, port multiplier capability and ATAPI support. Silicon Image also supplies high-performance, low-power fibre channel serializer/deserializers (SerDes) to leading switch manufacturers. Products sold into the storage market, as a percentage of our total revenue, generated 13.4% and 18.1% of our total revenue for the three and nine months ended September 30, 2005, respectively and 18.7% and 23.9% of our total revenue for the three and nine months ended September 30, 2004, respectively. In September 2004, Silicon Image introduced its first products based on its SteelVine(TM) storage architecture that is expected to serve the storage needs of the SMB and consumer electronics markets. Demand for our storage semiconductor products is dependent upon the rate at which interface technology transitions from parallel to serial, market acceptance of our SteelVine(TM) architecture, and the extent to which SATA

functionality is integrated into chipsets and controllers offered by other companies, which would make our discrete devices unnecessary where we have not already licensed our technology.

Silicon Image is a leader in the global PC and digital display arena with its innovative PanelLink-branded digital interconnect technology, which enables an all-digital connection between PC host systems, such as PC motherboards, graphics add-in boards, notebook PCs and digital displays such as LCD monitors, plasma displays and projectors. Silicon Image’s PanelLink technology serves as the basis for both the DVI standard as well as for the popular HDMI standard. Together, Silicon Image’s PanelLink DVI and HDMI solutions have shipped more than 125.0 million units to date. Products sold into the PC market generated 20.9% and 23.4% of our total revenue for the three and nine months ended September 30, 2005, respectively and 21.5% and 23.9% of our revenue for the three and nine months ended September 30, 2004, respectively.

We also pursue a strategy of licensing our intellectual property. This strategy is complementary to the sale of our products, further monetizes our valuable intellectual property and accelerates market adoption of our technologies. Most of our licenses include a field of use restriction that prevents most of our licensees from building a chip in direct competition with those market segments we have chosen to pursue. Revenue from development for licensees, licensing and royalties accounted for 9.9% and 8.25% of our total revenue for the three and nine months ended September 30, 2005, respectively and 13.4% and 13.2% of our total revenue for the three and nine months ended September 30, 2004, respectively. Licensing contracts are complex and depend upon many factors including completion of milestones, allocation of values to delivered items, and customer acceptances. Although we attempt to make these factors predictable, many of these factors require significant judgment. License revenue has been uneven and unpredictable over time, and is expected to continue to be uneven and unpredictable for the foreseeable future, resulting in considerable fluctuation in the amount of revenue recognized in a particular quarter.

Commitments, Contingencies and Concentrations

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our top five customers, including distributors, generated 56.6% and 52.6% of our revenue for the three and nine months ended September 30, 2005, respectively, and 50.2% and 46.7% of our revenue for the three and nine months ended September 30, 2004, respectively. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEM’s rely upon third party manufacturers or distributors to provide purchasing and inventory management functions. For the three and nine months ended September 30, 2005, 50.9% and 49.9%, respectively, of our revenue was generated through distributors, compared to 46.9% and 43.6%, respectively, for the comparable period of 2004. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases faster than product revenue, we would expect a decrease in the percentage of our total revenue generated through distributors.

A significant portion of our revenue is generated from products sold overseas. Sales to customers in Asia, including distributors, generated 69.1% and 66.9% of our revenue in the three and nine months ended September 30, 2005, and 67.0% and 68.0% for the three and nine month periods ended September 30, 2004. The reason for the geographical concentration in Asia is that most of our products are part of flat panel TV’s, graphic cards and motherboards, the majority of which are manufactured in Asia. The percentage of our revenue derived from any country is dependent upon where our end customers choose to manufacture their products. Accordingly, variability in our geographic revenue is not necessarily indicative of any geographic trends, but rather is the combined effect of new design wins and changes in customer manufacturing locations. All revenue to date has been denominated in U.S. dollars.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are relevant. Actual results may differ materially from our estimates. We believe the following accounting policies to be most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition, (2) allowance for doubtful accounts receivable, (3) inventories, (4) long-lived assets, (5) goodwill, (6) deferred tax assets, (7) accrued liabilities, (8) stock-based compensation expense, and (9) legal matters. For a discussion of the critical accounting estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2004.

Results of Operations

REVENUE


	Three months ended September 30,							Nine months ended September 30,
	2005		2004		Change			2005		2004		Change
	(dollars in thousands)
Product revenue	$	50,443	$	41,474		21.6	%	$	138,574	$	110,350		25.6	%
Development, licensing and royalty revenue		5,559		6,394		-13.1	%		12,469		16,737		-25.5	%

Total revenue	$	56,002	$	47,868		17.0	%	$	151,043	$	127,087		18.9	%


	Three months ended September 30,							Nine months ended September 30,
	2005		2004		Change			2005		2004		Change
	(dollars in thousands)
Consumer Electronics	$	34,127	$	26,987		26.5	%	$	82,162	$	60,519		35.8	%
Storage		9,706		10,408		-6.7	%		32,744		35,936		-8.9	%
Personal Computers		12,169		10,473		16.2	%		36,137		30,632		18.0	%

Total revenue	$	56,002	$	47,868		17.0	%	$	151,043	$	127,087		18.9	%

Total revenue was $56.0 million and $151.0 million for the three and nine month periods ended September 30, 2005, respectively, representing an increase of 17.0% and 18.9%, relative to comparable periods of 2004. Revenue in Consumer Electronics and Personal Computers was up for both periods and was partially offset by lower sales of Storage products. The increase in Consumer Electronics revenue was due to continued strong demand for our HDMI receivers for use in various devices including high definition plasma and LCD televisions, which were partially offset by decreases in licensing related to Consumer Electronics. The increase in Personal Computers revenue reflects strong demand for our receivers used in flat panel displays. The primary reason for the decrease in Storage revenue was a decrease in sales of our higher end SATA products and the continued phase out of PATA products partially offset by an increase in storage licenses. The decrease in development, licensing and royalty revenue was due to the inherently uneven nature of our licensing revenue.

STOCK BASED COMPENSATION EXPENSE (BENEFIT)

The following table summarizes the components of our stock compensation expense (benefit) for the three and nine months ended September 30, 2005 and 2004 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Options granted to employees	$	4		$	855		$	260		$	906
Options granted to non-employees		625			1,454			2,249			4,220
Option repricings		(2,233	)		(1,047	)		(12,508	)		16,609
Options assumed in connection with acquisitions		157			265			526			992

Stock compensation expense (benefit)	$	(1,447	)	$	1,527		$	(9,473	)	$	22,727

In the table above, options granted to non-employees, and option repricings are significantly impacted by changes in our stock prices. Increases in our stock price generally have the effect of increasing the associated expense. Decreases in our stock price have the effect of decreasing the associated expense or increasing the associated benefit.

COST OF REVENUE AND GROSS PROFIT


	Three months ended September 30,								Nine months ended September 30,
	2005			2004			Change		2005			2004			Change
	(dollars in thousands)
Cost of revenue (1)	$	20,868		$	18,204		$	2,664	$	57,360		$	50,414		$	6,946
Product gross profit (excluding licensing revenue)		29,575			23,270			6,305		81,214			59,936			21,278
Product gross profit margin		58.6	%		56.1	%				58.6	%		54.3	%
Total gross profit	$	35,134		$	29,664		$	5,470	$	93,683		$	76,673		$	17,010
Total gross profit margin		62.7	%		62.0	%				62.0	%		60.3	%


(1) Includes stock compensation expense (benefit)		$	(252	)		$	(110	)						$	(1,408	)		$	1,890

Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well as other related overhead costs including stock compensation expense (benefit). Cost of revenue was $20.9 million and $18.2 million for the three months ended September 30, 2005 and 2004, respectively. The $2.7 million increase in the three months ended September 30, 2005 over the comparable period of 2004 was primarily due to the higher volume and mix of our revenue. Cost of revenue was $57.4 million and $50.4 million for the nine months ended September 30, 2005 and 2004, respectively. Stock compensation benefit was $1.4 million in the first nine months of 2005 compared to a stock compensation expense of $1.9 million in the first nine months of 2004. The combination of higher sales volumes and sales mix also contributed to the change in cost of revenue.

Total gross profit was $35.1 million for the three months ended September 30, 2005 an increase of $5.5 million from $29.7 million in the same period of 2004. Gross profit margin was 62.7% for the three months ended September 30, 2005 compared to 62.0% in the same period of 2004. The primary reason for the increase in the gross profit margin was sales volume and mix skewed to slightly higher margin products, offset by lower licensing revenue. Total gross profit was $93.7 million for the nine months ended September 30, 2005 an increase of $17.0 million from $76.7 million in the same period of 2004. Gross profit margin was 62.0% for the nine months ended September 30, 2005 compared 60.3% in the same period of 2004. The increase in gross profit margin for the nine month period ended September 30, 2005 compared with the same period of the prior year was primarily due to lower stock compensation expense offset by a decrease in licensing revenue and erosion in our average selling prices and changes in sales mix.

OPERATING EXPENSES


	Three months ended September 30,									Nine months ended September 30,
	2005			2004			Change			2005			2004			Change
	(dollars in thousands)
Research and development (1)	$	12,309		$	12,180			1.1	%	$	32,334		$	45,223			-28.5	%

Percentage of total revenue		22.0	%		25.4	%					21.4	%		35.6	%
Selling, general and administrative (2)	$	7,754		$	9,028			-14.1	%	$	20,580		$	31,009			-33.6	%

Percentage of total revenue		13.8	%		18.9	%					13.6	%		24.4	%
Amortization of intangible assets	$	274		$	357			-23.2	%	$	822		$	1,070			-23.2	%
Interest income and other, net		908			211			330.3	%		2,167			399			443.1	%
Gain (loss) on investment security		—			(64	)		-100.0	%		1,263			926			36.4	%


(1) Includes stock compensation expense (benefit)	$	(655	)	$	595	$	(4,346	)	$	11,584
(2) Includes stock compensation expense (benefit)		(540	)		1,042		(3,719	)		9,253

Research and Development. R&D expense consists primarily of employee compensation, including stock compensation expense (benefit), and other related costs, fees for independent contractors, the cost of software tools used for designing and testing our products, and costs associated with prototype materials. R&D expense was $12.3 million and $12.2 million for the three months ended September 30, 2005 and 2004, respectively. R&D expense for the three months ended September 30, 2005 included a stock compensation benefit of $655,000 compared to a stock compensation expense of $595,000 for the same period in 2004. Offsetting the benefit from stock compensation in R&D expense for the three months ended September, 2005 were higher compensation expense resulting from increased staffing, and higher prototype expense reflecting increased R&D activity. R&D expense was $32.3 million and $45.2 million for the nine months ended September 30, 2005 and 2004, respectively. The stock compensation benefit was the key reason for the decrease in R&D expense when comparing the nine month periods, as a $4.3 million benefit was recorded in the 2005 period whereas there was a $11.6 million expense recorded in the 2004 period. Also included as R&D expense for the nine month period of 2005 was a benefit from a credit to expense of approximately $1.5 million related to engineering projects funded by an outside party, irrespective of the results of the projects. Additionally, compensation expense and prototype expenses were higher in the nine month period of 2005 reflecting increased headcount and R&D activity. R&D expense is expected to increase due to the development and introduction of new products.

Selling, General and Administrative. SG&A expense consists primarily of employee compensation, including stock compensation expense (benefit), sales commissions, professional fees, and marketing and promotional expenses. SG&A expense was $7.8 million and $9.0 million for the three months ended September 30, 2005 and 2004, respectively. The stock compensation benefit of $540,000 in 2005 compared to a stock compensation expense of $1.0 million in 2004 was the primary reason for the decrease in overall SG&A expense when comparing the three month periods. SG&A expense was $20.6 million and $31.0 million for the nine months ended for the nine months ended September 30, 2005 and 2004, respectively. The primary reason for the decrease in the SG&A expense when comparing the nine month periods was also the stock compensation benefit of $3.7 million recorded for the nine month period of 2005 compared to the $9.3 million expense recorded in the 2004 period. Additional factors contributing to the change in SG&A expense for the nine months were higher compensation expense reflecting increased headcount, and higher commission expense resulting from higher sales. SG&A expense is expected to increase due to additional marketing and branding programs.

Amortization of Intangible Assets. Amortization of intangible assets was $274,000 and $822,000 for the three and nine months ended September 30, 2005, compared to $357,000 and $1.1 million for the three and nine months ended September 30, 2004, respectively, pursuant to our acquisition of Transwarp Networks, Inc. during the second quarter of 2003.

Restructuring. During the third quarter of 2001, we began a program to focus our business on products and technology, including those obtained through acquisitions, in which we have, or believe we can achieve, a market leadership position. As part of this program, we decided to cancel numerous products under development, to remove certain projects from our development plan, to phase out or de-emphasize certain existing products and to integrate the operations of two acquired companies—CMD Technology and Silicon Communication Lab.

In connection with this program, during the third quarter of 2001 through the first quarter of 2003, we recorded restructuring expenses as a result of four workforce reductions by eliminating approximately 136 positions which consisted of both cash severance-related costs and non-cash severance-related costs representing the intrinsic value of modified stock options. In addition, restructuring expenses during this period were also a result of expected loss on leased facilities, fixed asset write-downs, impairment of goodwill, intangible assets and acquired technology offset by reversals of unearned compensation, a component of stockholders’ equity, for unvested stock options that were cancelled in connection with employee terminations.


	2005								2004
	Severance and		Leased						Severance and			Leased
	Benefits		Facilities			Total			Benefits			Facilities			Total
Balance as of January 1	$	32	$	1,004		$	1,036		$	37		$	1,838		$	1,875
Cash payments		—		(562	)		(562	)		(5	)		(569	)		(574	)
Adjustment related to lease negotiation		—		(220	)		(220	)		—			—			—

Balance as of September 30	$	32	$	222		$	254		$	32		$	1,269		$	1,301

Interest Income and other, net. The net amount of interest income and other, which principally includes interest income and interest expense, was $908,000 and $2.2 million for the three and nine month periods ended September 30, 2005, respectively, compared to $211,000 and $399,000 for the three and nine month periods ended September 30, 2004, respectively. This increase was primarily due to higher interest income resulting from larger cash and investment balances and higher interest rates in the periods ended September 30, 2005 than in the comparable periods of 2004.

Gain on investment security. During the nine months ended September 30, 2005, we recorded a net gain of $1.3 million from the mark to market and subsequent sale of our holdings in Leadis Technology, Inc (Leadis). These holdings related to equity we acquired in a transaction with Leadis in 2001. In the three months ended September 30, 2004, we recorded a $64,000 loss from this investment. In the nine months ended September 30, 2004, we recorded a gain from this investment of $926,000. We fully liquidated our investment in Leadis in the three months ended June 30, 2005.

Provision for taxes. For the three and nine month periods ended September 30, 2005, we recorded a provision for taxes of $5.8 million and $6.4 million, respectively. The effective tax rate was 36.9% for the three months ended September 30, 2005 due to the cumulative effective of an increase in the estimate of the annual effective tax rate from 2.9% to 14.7%. The change in the annual effective tax rate resulted from an increase in the Company’s estimated annual taxable income for 2005. The estimated effective tax rate also reflects the fact that a portion of the benefit of net operating loss carryforwards resulting from stock option transactions does not reduce the tax provision but rather is recorded as a credit to additional paid-in capital. During the three months ended September 30, 2005, additional paid-in capital increased by approximately $5.3 million as a result of the benefit from such net operating losses. The effective annual tax rate of 14.7% is comprised of 12.5% Federal, 1.8% State and .4% foreign. The effective Federal tax rate of 12.5% differs from the Federal statutory tax rate of 35% primarily due to the partial release of expected benefits from the utilization of net operating loss carryforwards.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION


	September 30,			September 30,
	2005			2004			Change
	(dollars in thousands)
Total cash, cash equivalents and short term investments	$	134,118		$	78,710		$	55,408


Cash provided by operating activities	$	37,247		$	27,948		$	9,254
Cash provided by (used in) investing activities		(41,979	)		(3,616	)		(38,318	)
Cash provided by financing activities		10,111			14,117			(4,006	)

Net increase (decrease) in cash and cash equivalents	$	5,379		$	38,449		$	(33,070	)

Cash and Investments

Cash, cash equivalents and short-term investments were $134.1 million at September 30, 2005, an increase of $55.4 million from $78.7 million at December 31, 2004.

Operating Activities

We generated $37.2 million in cash from operating activities in the nine months ended September 30, 2005 as compared to $27.9 in the same period of 2004. The major components of operating cash flow were the $37.0 million in net income, the change in accounts payable, and the add back of non-cash expenses such as depreciation and amortization. These items were partially offset by, among other items, the $9.5 million in non-cash benefit relating to stock compensation and the increase in accounts receivable.

Investing and Financing Activities

We used $42.0 million in cash in our investing activities in the nine months ended September 30, 2005 as compared to $3.6 million in the same period of 2004. This use of cash resulted from our purchases, net of the sale and maturity, of short term investments. Financing activities in the nine months ended September 30, 2005 consisted of cash inflow of $10.1 million principally from the proceeds from the exercise of stock options and proceeds from sales of shares under our employee stock purchase plan.

Debt and Lease Obligations

During the three months ended March 31, 2003, we borrowed $383,000 to finance certain capital equipment. This term loan bore interest at 5% and required monthly payments through its maturity in February 2005. During the three-months ended March 31, 2005, this remaining balance on this loan was repaid in full. During the period ended March 31, 2004, we entered into an agreement to extend this debt facility by way of a revolving line of credit with an availability of up to $10.0 million, and an equipment line of credit of up to $3.0 million. Borrowings under the revolving line are limited to the lesser of $10.0 million or 80% of eligible accounts receivable as defined in the loan agreement and bore interest at either prime plus 0.25% or LIBOR plus 2.75%, at our option. This revolving line of credit expired in May 2005 and was not renewed.

In January 2005, we acquired certain capital equipment under a debt arrangement and as of September 30, 2005, the future debt obligations under this arrangement were approximately $80,000.

Future minimum payments for our operating leases, debt and inventory related purchase obligations outstanding at September 30, 2005 are as follows (in thousands):


Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Debt and capital lease obligations	$	364	$	305	$	59	$	—	$	—
Operating lease obligations (1)		8,834		2,190		3,848		2,796		—
Inventory purchase obligations		9,771		9,771		—		—		—

Total contractual obligations	$	18,969	$	12,266	$	3,907	$	2,796	$	—


(1)		Future minimum lease payments under operating leases have not been reduced by expected sublease rental income or by the amount of our restructuring accrual that relates to leased facilities.

Based on our estimated cash flows, we believe our existing cash and short-term investments are sufficient to meet our capital and operating requirements for at least the next 12 months. Our future operating and capital requirements depend on many factors, including the levels at which we generate product revenue and related margins, the extent to which we generate cash through stock option exercises and proceeds from sales of shares under our employee stock purchase plan, the timing and extent of development, licensing and royalty revenue, investments in inventory and accounts receivable, the cost of securing access to adequate manufacturing capacity, our operating expenses, including legal and patent assertion costs, and general economic conditions. In addition, cash may be required for future acquisitions should we choose to pursue any. To the extent existing resources and cash from operations are insufficient to support our activities, we may need to raise additional funds through public or private equity or debt financing. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

Factors Affecting Future Results

You should carefully consider the following risk factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our common stock. These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

We operate in rapidly evolving markets, which makes it difficult to evaluate our future prospects.

The revenue and income potential of our business and the markets we serve are early in their lifecycle and are difficult to predict. The Digital Visual Interface (DVI) specification, which is based on technology developed by us and used in many of our products, was first published in April 1999. We completed our first generation of consumer electronics and storage IC products in mid-to-late 2001. The preliminary serial ATA specification was first published in August 2001. The High Definition Multimedia Interface (HDMI) specification was first released in December 2002. Our SteelVine storage architecture was first released in September 2004. Accordingly, we face risks and difficulties frequently encountered by companies in new and rapidly evolving markets. If we do not successfully address these risks and difficulties, our results of operations could be negatively effected.

We have a history of losses and may not sustain profitability.

For the three and nine months ended September 30, 2005, we generated net income of $9.9 and $37.0 million. However, prior to 2005, we have incurred net losses in each fiscal year since our inception. We incurred losses of $324,000 and $12.8 million for the years ended December 31, 2004 and 2003, respectively.

Our quarterly operating results may fluctuate significantly and are difficult to predict.

Our quarterly operating results are likely to vary significantly in the future based on a number of factors over which we have little or no control. These factors include, but are not limited to:

	•		the growth, evolution and rate of adoption of industry standards for our key markets, including digital-ready PCs and displays, consumer electronics and storage devices and systems;

	•		the fact that our licensing revenue is heavily dependent on a few key licensing transactions being completed for any given period, the timing of which is not always predictable and is especially susceptible to delay beyond the period in which completion is expected, and our concentrated dependence on a few licensees in any period for substantial portions of our expected licensing revenue and profits;

	•		the fact that our licensing revenue has been uneven and unpredictable over time, and is expected to continue to be uneven and unpredictable for the foreseeable future, resulting in considerable fluctuation in the amount of revenue recognized in a particular quarter;

	•		competitive pressures, such as the ability of competitors to successfully introduce products that are more cost-effective or that offer greater functionality than our products, including integration into their products of functionality offered by our products, the prices set by competitors for their products, and the potential for alliances, combinations, mergers and acquisitions among our competitors;

	•		average selling prices of our products, which are influenced by competition and technological advancements, among other factors;

	•		government regulations regarding the timing and extent to which digital content must be made available to consumers;

	•		the availability of other semiconductors or other key components that are required to produce a complete solution for the customer; usually, we supply one of many necessary components;

	•		the cost of components for our products and prices charged by the third parties who manufacture, assemble and test our products;

	•		fluctuations in the price of our common stock, which drive a substantial portion of our stock compensation expense; and

	•		the nature and extent of litigation activities, particularly relating to our patent infringement suit against Genesis Microchip, and

	•		any subsequent legal proceedings related to the matters raised in that suit; and class action lawsuits against us that were initiated in early 2005;

Because we have little or no control over these factors and/or their magnitude, our operating results are difficult to predict. Any substantial adverse change in any of these factors could negatively affect our business and results of operations.

Our future quarterly operating results are highly dependent upon how well we manage our business.

Our quarterly operating results may fluctuate based on how well we manage our business. Some of these factors include the following:

	•		our ability to manage product introductions and transitions, develop necessary sales and marketing channels, and manage other matters necessary to enter new market segments;

	•		our ability to successfully manage our business in multiple markets such as PC, storage and CE; which may involve additional research and development, marketing or other costs and expenses;

	•		our ability to close licensing deals when expected and make timely deliverables and milestones on which recognition of revenue often depends;

	•		our ability to engineer customer solutions that adhere to industry standards in a timely, and cost-effective manner;

	•		our ability to achieve acceptable manufacturing yields and develop automated test programs within a reasonable time frame for our new products;

	•		our ability to manage joint ventures and projects, design services, and our supply chain partners;

	•		our ability to monitor the activities of our licensees to ensure compliance with license restrictions and remittance of royalties;

	•		our ability to structure our organization to enable achievement of our operating objectives and to meet the needs of our customers and markets;

	•		the success of the distribution and partner channels through which we choose to sell our products; and

	•		our ability to manage expenses and inventory levels.

If we fail to effectively manage our business, this could adversely affect our results of operations.

The licensing component of our business strategy increases business risk and volatility.

Part of our business strategy is to license certain of our Company’s technology to companies that address markets in which we do not want to directly participate. We signed our first license contract in December 2001 and have limited experience marketing and selling our technology on a licensing basis. There can be no assurance that additional companies will be interested in licensing our technology on commercially favorable terms or at all. We also cannot ensure that companies who license our technology will introduce and sell products incorporating our technology, will accurately report royalties owed to us, will pay agreed upon royalties, will honor agreed upon market restrictions, will not infringe upon or misappropriate our intellectual property and will maintain the confidentiality of our proprietary information. Licensing contracts are complex and depend upon many factors including completion of milestones, allocation of values to delivered items, and customer acceptances. Many of these factors require significant judgments. Licensing revenue could fluctuate significantly from period to period because they are heavily dependent on a few key deals being

completed in a particular period, the timing of which is difficult to predict. Because of their high margin content, licensing revenue can have a disproportionate impact on gross profit and profitability. Also, generating revenue from licensing arrangements is a lengthy and complex process that may last beyond the period in which efforts begin, and once an agreement is in place, the timing of revenue recognition may be dependent on customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology, and other factors. In addition, in any period, our expectation of licensing revenue is or may be dependent on one or a few licenses being completed. Licensing that occurs in connection with actual or contemplated litigation is subject to risk that the adversarial nature of the transaction will induce non-compliance or non-payment. The accounting rules associated with recognizing revenue from licensing transactions are increasingly complex and subject to interpretation. Due to these factors, the amount of license revenue recognized in any period may differ significantly from our expectations.

We face intense competition in our markets, which may lead to reduced revenue from sales of our products and increased losses.

The PC, CE and storage markets in which we operate are intensely competitive. These markets are characterized by rapid technological change, evolving standards, short product life cycles and declining selling prices. We expect competition for many of our products to increase, as industry standards become widely adopted and as new competitors enter our markets.

Our products face competition from companies selling similar discrete products, and from companies selling products such as chipsets with integrated functionality. Our competitors include semiconductor companies that focus on the display, CE or storage markets, as well as major diversified semiconductor companies, and we expect that new competitors will enter our markets. Current or potential customers, including our own licensees, may also develop solutions that could compete with us, including solutions that integrate the functionality of our products into their solutions. In addition, potential OEM customers may have internal semiconductor capabilities, and may develop their own solutions for use in their products rather than purchasing them from companies such as us. Some of our competitors have already established supplier or joint development relationships with current or potential customers and may be able to leverage their existing relationships to discourage these customers from purchasing products from us or persuade them to replace our products with theirs. Many of our competitors have longer operating histories, greater presence in key markets, better name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do As a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements, or devote greater resources to the promotion and sale of their products. In particular, well-established semiconductor companies, such as Analog Devices, Intel, National Semiconductor and Texas Instruments, and consumer electronics manufacturers, such as Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba, may compete against us in the future. Some of our competitors could merge, which may enhance their market presence. Existing or new competitors may also develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition has resulted in, and is likely to continue to result in price reductions and loss of market share in certain markets. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not reduce our revenue and gross margins.

Our success depends in part on demand for our new SteelVine products.

Our growth depends in part on market acceptance of our new product offerings based on our SteelVine architecture. These products may not achieve the desired level of market acceptance in the anticipated timeframes. We anticipate that the products based upon our SteelVine architecture will be sold into markets where we have limited experience. Furthermore, there is no established market for these products. There can be no assurance that we will be able to successfully market and sell the products based upon the SteelVine architecture and failure to do so would adversely affect our business.

Our success depends in part on the success of our new integrated HDMI DTV products

Our future growth depends in part on the success of our highly integrated Digital TV System On a Chip solutions currently sampling in the market and which may or may not contribute significantly to our overall CE revenue. These products are subject to significant competition from established companies that have been selling these kinds of products for longer periods of time than Silicon Image.

Demand for our consumer electronics products is dependent on the adoption and widespread use of the HDMI specification.

Our success in the consumer electronics market is largely dependent upon the rapid and widespread adoption of the HDMI specification, which combines high-definition video and multi-channel audio in one digital interface and uses our patented underlying transition minimized differential signaling (TMDS(R) ) technology, and optionally Intel’s HDCP technology, as the basis for the interface. Version 1.0 of the specification was published for adoption in December 2002 and version 1.1 of the specification was published for adoption in May 2004. We cannot predict the rate at which manufacturers will adopt the HDMI specification. Adoption of the HDMI specification may be affected by the availability of consumer products, such as DVD players and televisions, and of computer components that implement this new interface. Other competing specifications may also emerge that could adversely affect the acceptance of the HDMI specification. Delays in the widespread adoption of the HDMI specification could reduce acceptance of our products, limit or reduce our revenue growth and increase our losses.

We believe that the adoption of our CE products may be affected in part by U.S. and international regulations relating to digital television, cable, satellite and over-the-air digital transmissions, specifically regulations relating to the transition from analog to digital television. The Federal Communications Commission (FCC) has adopted rules governing the transition from analog to digital television, which include rules governing the requirements for television sets sold in the United States designed to speed the transition to digital television. The FCC has delayed such requirements and timetables for phasing in digital television in the past. We cannot predict whether the FCC will further delay its rules relating to the digital television requirements and timetables. In the event that additional regulatory activities, either in the United States or internationally, delay or postpone the transition to digital television beyond the anticipated time frame, that could reduce the demand for our CE products.

In addition, we believe that the rate of HDMI adoption may be accelerated by FCC rules requiring that after July 2005 high-definition STBs distributed by cable operators include a DVI or HDMI interface and that as of certain phase-in dates televisions marketed or labeled as “digital cable ready” include a DVI or HDMI interface. However, we cannot predict whether these rules will be amended prior to phase in or that their phase-in dates will not be pushed back or otherwise delayed. In the event that the phase-in dates are postponed or otherwise delayed the demand for our products could be reduced, which would adversely affect our business. In the event that mandatory use of a DVI or HDMI interface in STBs distributed by cable operators were to be delayed beyond the currently anticipated time frame or not required at all, that could reduce the demand for our CE products, which would adversely affect our business. In addition, we cannot guarantee that the FCC will not in the future reverse these rules or adopt rules requiring or supporting different interface technologies, either of which would adversely affect our business.

We believe that the adoption of HDMI may be affected by the availability of high-quality digital content to devices equipped with HDMI or DVI interfaces. Typically high quality digital content is made available to devices equipped with HDMI or DVI interfaces through high-definition television or digital television distribution channels. To the extent that the availability of such content is delayed or not made available by the content owners or broadcasters and distributors of such content then demand for HDMI products could be delayed or reduced.

Transmission of audio and video from source devices (such as a DVD player or STB) to sink devices (such as an HDTV) over HDMI with HDCP represents a combination of new technologies working in concert. Cable and satellite system operators are just beginning to require transmissions of digital video with HDCP between source and sink devices in consumer homes, and DVD players incorporating this technology have only recently come to market. Complexities with these technologies and the variability in implementations between manufacturers may cause some of these products to work incorrectly, or for the transmissions to not occur correctly, or for certain products not to be interoperable. Also, the user experience associated with audiovisual transmissions over HDMI with HDCP is unproven, and users may reject products incorporating these technologies or they may require more customer support than expected. Delays or difficulties in integration of these technologies into products or failure of products incorporating this technology to achieve market acceptance could have an adverse effect on our business.

Our success depends in part on strategic relationships.

We have entered into strategic partnerships with third parties. For example, we have entered into a relationship with Sunplus which includes licensing and development agreements. Under these agreements, Sunplus licenses our technology and we and Sunplus jointly develop products.

While these strategic partnerships are designed to drive revenue growth and adoption of our technologies and industry standards promulgated by us and also reduce our research and development expenses, there is no guarantee that these strategic partnerships will be successful. Negotiating and performing under these strategic partnerships involves significant time and expense; we may not realize anticipated increases in revenue, standards adoption or cost savings; and these strategic partnerships may make it easier for the third parties to compete with us; any of which may have a negative effect our business and results of operations.

We do not have long-term commitments from our customers and we allocate resources based on our estimates of customer demand.

Substantially all of our sales are made on the basis of purchase orders, rather than long-term agreements. In addition, our customers may cancel or reschedule purchase orders. We purchase inventory components and build our products according to our estimates of customer demand. This process requires us to make multiple assumptions, including volume and timing of customer demand for each product, manufacturing yields and product quality. If we overestimate customer demand or product quality or under estimate manufacturing yields, we may build products that we may not be able to sell at an acceptable price or at all. As a result, we would have excess inventory, which would increase our losses. Additionally, if we underestimate customer demand or if sufficient manufacturing capacity is unavailable, we will forego revenue opportunities or incur significant costs for rapid increases in production, lose market share and damage our customer relationships.

Our lengthy sales cycle can result in a delay between incurring expenses and generating revenue, which could harm our operating results.

Because our products are based on new technology and standards, a lengthy sales process, typically requiring several months or more, is often required before potential customers begin the technical evaluation of our products. This technical evaluation can exceed nine months before the potential customer informs us whether we have achieved a design win, which is not a binding commitment to purchase our products. After achieving a design win, it can then be an additional nine months before a customer commences volume shipments of systems incorporating our products, if at all. Given our lengthy sales cycle, we may experience a delay between the time we incur expenditures and the time we generate revenue, if any. As a result, our operating results could be seriously harmed if a significant customer reduces or delays orders, or chooses not to release products incorporating our products.

We depend on a few key customers and the loss of any of them could significantly reduce our revenue.

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For the three and nine months ended September 30, 2005, shipments to World Peace International, an Asian distributor, generated 15.2% and 17.3% of our revenue and shipments to Microtek, a distributor, generated 12.2% and 10.9% of our revenue. For the year ended December 31, 2004, shipments to World Peace International, generated 15.0% of our revenue, and shipments to Microtek generated 12.0% of our revenue. In addition, an end-customer may buy through multiple distributors, contract manufacturers, and/or directly, which could create an even greater concentration. We cannot be certain that customers and key distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to sell our products and generate revenue. As a result of this concentration of our customers, our results of operations could be negatively affected if any of the following occurs:

•		one or more of our customers, including distributors, becomes insolvent or goes out of business;

•		one or more of our key customers or distributors significantly reduces, delays or cancels orders; or

•		one or more significant customers selects products manufactured by one of our competitors for inclusion in their future product generations.

Due to our participation in multiple markets, our customer base has broadened significantly and we therefore anticipate being less dependent on a relatively small number of customers to generate revenue. However, as product mix fluctuates from quarter to quarter, we may become more dependent on a small number of customers or a single customer for a significant portion of our revenue in a particular quarter, the loss of which could adversely affect our operating results.

We sell our products through distributors, which limits our direct interaction with our customers, therefore reducing our ability to forecast sales and increasing the complexity of our business.

Many original equipment manufacturers rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors generated 50.9% and 49.9% of our revenue for the three and nine months ended September 30, 2005, 45% of our revenue for the year ended December 31, 2004, and 42% of our revenue for the year ended December 31,2003. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

•

manage a more complex supply chain;

	•		monitor and manage the level of inventory of our products at each distributor;

	•		estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and

	•		monitor the financial condition and credit-worthiness of our distributors, many of which are located outside of the United States, and the majority of which are not publicly traded;

	•		Since we have limited ability to forecast inventory levels at our end customers, it is possible that there may be significant build-up of inventories in the retail channel, with the OEM or the OEM’s contract manufacturer. Such a buildup could result in a slowdown in orders, requests for returns from customers, or requests to move out planned shipments. This could adversely impact our revenue and profits.

Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.

Our success depends on the development and introduction of new products, which we may not be able to do in a timely manner because the process of developing high-speed semiconductor products is complex and costly.

The development of new products is highly complex, and we have experienced delays, some of which exceeded one year, in the development and introduction of new products on several occasions in the past. We have recently introduced new storage products for the consumer and small to medium business markets and we expect to introduce new consumer electronics, storage and PC products in the future. As our products integrate new, more advanced functions, they become more complex and increasingly difficult to design, manufacture and debug. Successful product development and introduction depends on a number of factors, including, but not limited to:

	•		accurate prediction of market requirements and evolving standards, including enhancements or modifications to existing standards such as DVI, HDCP, SATA I and SATA II, and HDMI;

	•		identification of customer needs where we can apply our innovation and skills to create new standards or areas for product differentiation that improve our overall competitiveness either in an existing market or in a new market;

	•		development of advanced technologies and capabilities, and new products that satisfy customer requirements;

	•		competitors’ and customers’ integration of the functionality of our products into their products, which puts pressure on us to continue to develop and introduce new products with new functionality;

	•		timely completion and introduction of new product designs;

	•		management of product life cycles;

	•		use of leading-edge foundry processes and achievement of high manufacturing yields and low cost testing; and

	•		market acceptance of new products; and

	•		market acceptance of new architectures like SteelVine.

Accomplishing all of this is extremely challenging, time-consuming and expensive and there is no assurance that we will succeed. Product development delays may result from unanticipated engineering complexities, changing market or competitive product requirements or specifications, difficulties in overcoming resource limitations, the inability to license third-party technology or other factors. Competitors and customers may integrate the functionality of our products into their products that would reduce demand for our products. If we are not able to develop and introduce our products successfully and in a timely manner, our costs could increase or our revenue could decrease, both of which would adversely affect our operating results. In addition, it is possible that we may experience delays in generating revenue from these products or that we may never generate revenue from these products. We must work with a semiconductor foundry and with potential customers to complete new product development and to validate manufacturing methods and processes to support volume production and potential re-work. Each of these steps may involve unanticipated difficulties, which could delay product introduction and reduce market acceptance of the product. In addition, these difficulties and the increasing

complexity of our products may result in the introduction of products that contain defects or that do not perform as expected, which would harm our relationships with customers and our ability to achieve market acceptance of our new products. There can be no assurance that we will be able to achieve design wins for our planned new products, that we will be able to complete development of these products when anticipated, or that these products can be manufactured in commercial volumes at acceptable yields, or that any design wins will produce any revenue. Failure to develop and introduce new products, successfully and in a timely manner, may adversely affect our results of operations.

We have made acquisitions in the past and may make acquisitions in the future, if advisable, and these acquisitions involve numerous risks.

Our growth depends upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. One of the ways we develop new products and enter new markets is through acquisitions. In 2001, we completed the acquisitions of CMD and SCL. In April 2003, we acquired TWN. We may acquire additional companies or technologies. Acquisitions involve numerous risks, including, but not limited to, the following:

	•		difficulty and increased costs in assimilating employees, including our possible inability to keep and retain key employees of the acquired business;

	•		disruption of our ongoing business;

	•		discovery of undisclosed liabilities of the acquired companies and legal disputes with founders or shareholders of acquired companies;

	•		inability to successfully incorporate acquired technology and operations into our business and maintain uniform standards, controls, policies and procedures;

	•		inability to commercialize acquired technology; and

	•		the need to take impairment charges or write-downs with respect to acquired assets.

No assurance can be given that our prior acquisitions or our future acquisitions, if any, will be successful or provide the anticipated benefits, or that they will not adversely affect our business, operating results or financial condition. Failure to manage growth effectively and to successfully integrate acquisitions made by us could materially harm our business and operating results.

The cyclical nature of the semiconductor industry may create constrictions in our foundry, test and assembly capacity.

The semiconductor industry is characterized by significant downturns and wide fluctuations in supply and demand. This cyclicality has led to significant fluctuations in product demand and in the foundry, test and assembly capacity of third-party suppliers. Production capacity for fabricated semiconductors is subject to allocation, whereby not all of our production requirements would be met. This may impact our ability to meet demand and could also increase our production costs. Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in industry-wide conditions.

We depend on third-party sub-contractors to manufacture, assemble and test nearly all of our products, which reduce our control over the production process.

We do not own or operate a semiconductor fabrication facility. We rely on third party semiconductor manufacturing companies overseas to produce the vast majority all of our semiconductor products. We also rely on outside assembly and test services to test all of our semiconductor products. Our reliance on independent foundries, assembly and test facilities involves a number of significant risks, including, but not limited to:

	•		reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;

	•		lack of guaranteed production capacity or product supply;

	•		lack of availability of, or delayed access to, next-generation or key process technologies; and

•

limitations on our ability to transition to alternate sources if services are unavailable from primary suppliers.

In addition, our semiconductor products are assembled and tested by several independent subcontractors. We do not have a long-term supply agreement with all of our subcontractors, and instead obtain production services on a purchase order basis. Our outside sub-contractors have no obligation to supply products to us for any specific period of time, in any specific quantity or at any specific price, except as set forth in a particular purchase order. Our requirements represent a small portion of the total production capacity of our outside foundries, assembly and test facilities and our sub-contractors may reallocate capacity to other customers even during periods of high demand for our products. These foundries may allocate or move production of our products to different foundries under their control, even in different locations, which may be time consuming, costly, and difficult, have an adverse affect on quality, yields, and costs, and require us and/or our customers to re-qualify the products, which could open up design wins to competition and result in the loss of design wins and design-ins. If our subcontractors are unable or unwilling to continue manufacturing our products in the required volumes, at acceptable quality, yields and costs, and in a timely manner, our business will be substantially harmed. As a result, we would have to identify and qualify substitute contractors, which would be time-consuming, costly and difficult. This qualification process may also require significant effort by our customers, and may lead to re-qualification of parts, opening up design wins to competition, and loss of design wins and design-ins. Any of these circumstances could substantially harm our business. In addition, if competition for foundry, assembly and test capacity increases, our product costs may increase and we may be required to pay significant amounts or make significant purchase commitments to secure access to production services.

The complex nature of our production process, which can reduce yields and prevent identification of problems until well into the production cycle or, in some cases, after the product has been shipped.

The manufacture of semiconductors is a complex process, and it is often difficult for semiconductor foundries to achieve acceptable product yields. Product yields depend on both our product design and the manufacturing process technology unique to the semiconductor foundry. Since low yields may result from either design or process difficulties, identifying problems can often only occur well into the production cycle, when an actual product exists that can be analyzed and tested.

Further, we only test our products after they are assembled, as their high-speed nature makes earlier testing difficult and expensive. As a result, defects often are not discovered until after assembly. This could result in a substantial number of defective products being assembled and tested or shipped, thus lowering our yields and increasing our costs. These risks could result in product shortages or increased costs of assembling, testing or even replacing our products.

Although we test our products before shipment, they are complex and may contain defects and errors. In the past we have encountered defects and errors in our products. Because our products are sometimes integrated with products from other vendors, it can be difficult to identify the source of any particular problem. Delivery of products with defects or reliability, quality or compatibility problems, may damage our reputation and our ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased product returns, warranty and product liability claims against us that may not be fully covered by insurance. Any of these circumstances could substantially harm our business.

We face foreign business, political and economic risks because a majority of our products and our customers’ products are manufactured and sold outside of the United States.

A substantial portion of our business is conducted outside of the United States. As a result, we are subject to foreign business, political and economic risks. Nearly all of our products are manufactured in Taiwan or elsewhere in Asia, and for the three and nine months ended September 30, 2005, 73.9% and 72.2% of our revenue, and for the years ended December 31, 2004 and 2003, 72.0% and 74.0% of our revenue respectively was generated from customers and distributors located outside of the United States, primarily in Asia. We anticipate that sales outside of the United States will continue to account for a substantial portion of our revenue in future periods. Accordingly, we are subject to international risks, including, but not limited to:

	•		difficulties in managing from afar;

	•		political and economic instability, including international tension in Iraq, Korea and the China Strait and lack of normal diplomatic relationships between the United States and Taiwan;

	•		less developed infrastructures in newly industrializing countries;

	•		susceptibility of foreign areas to terrorist attacks;

	•		susceptibility to interruptions of travel, including those due to international tensions (including the war in and occupation of Iraq), medical issues such as the SARS and Avian Flu epidemics (particularly affecting the Asian markets we serve), and the financial instability and bankruptcy of major air carriers;

	•		bias against foreign, especially American, companies;

	•		difficulties in collecting accounts receivable;

	•		expense and difficulties in protecting our intellectual property in foreign jurisdictions;

	•		difficulties in complying with multiple, conflicting and changing laws and regulations, including export requirements, tariffs, import duties, visa restrictions, environmental laws and other barriers;

	•		exposure to possible litigation or claims in foreign jurisdictions; and

	•		competition from foreign-based suppliers and the existence of protectionist laws and business practices that favor these suppliers, such as withholding taxes on payments made to us.

These risks could adversely affect our business and our results of operations. In addition, original equipment manufacturers that design our semiconductors into their products sell them outside of the United States. This exposes us indirectly to foreign risks. Because sales of our products are denominated exclusively in United States dollars, relative increases in the value of the United States dollar will increase the foreign currency price equivalent of our products, which could lead to a change in the competitive nature of these products in the marketplace. This in turn could lead to a reduction in sales and profits.

The success of our business depends upon our ability to adequately protect our intellectual property.

We rely on a combination of patent, copyright, trademark, mask work and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. We have been issued patents and have a number of pending patent applications. However, we cannot assure you that any patents will be issued as a result of any applications or, if issued, that any claims allowed will protect our technology. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. It may be possible for a third-party, including our licensees, to misappropriate our copyrighted material or trademarks. It is possible that existing or future patents may be challenged, invalidated or circumvented and effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries. It may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents in the United States and in other jurisdictions. It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive, and the outcome often is not predictable. As a result, despite our efforts and expenses, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business. In addition, practicality also limits our assertion of intellectual property rights. Patent litigation is expensive and its results are often unpredictable. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights and/or antitrust claims. Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers, and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.

Our participation in the Digital Display Working Group requires us to license some of our intellectual property for free, which may make it easier for others to compete with us in the DVI PC market.

We are a promoter of the DDWG, which published and promotes the DVI specification. Our strategy includes establishing the DVI specification as the industry standard, promoting and enhancing this specification and developing and marketing products based on this specification and future enhancements. As a result:

	•		we must license for free specific elements of our intellectual property to others for use in implementing the DVI specification; and

	•		we may license additional intellectual property for free as the DDWG promotes enhancements to the DVI specification.

Accordingly, companies that implement the DVI specification in their products can use specific elements of our intellectual property for free to compete with us.

Our participation as a founder in the working group developing HDMI requires us to license some of our intellectual property, which may make it easier for others to compete with us in the market.

In April 2002, together with Sony, Philips, Thomson, Toshiba, Matsushita and Hitachi, we announced the formation of a working group to define the next-generation digital interface specification for consumer electronics products. Version 1.0 of the specification was published for adoption on December 9, 2002. The HDMI specification combines high-definition video and multi-channel audio in one digital interface and uses Silicon Image’s patented underlying TMDS(R) technology, optionally, along with Intel’s HDCP as the basis for the interface. The founders of the working group have signed a founder’s agreement in which each commits to license certain intellectual property to each other, and to adopters of the specification.

Our strategy includes establishing the HDMI specification as the industry standard, promoting and enhancing this specification and developing and marketing products based on this specification and future enhancements. As a result:

	•		we must license specific elements of our intellectual property to others for use in implementing the HDMI specification; and

	•		we may license additional intellectual property as the HDMI founders group promotes enhancements to the HDMI specification.

Accordingly, companies that implement the HDMI specification in their products can use specific elements of our intellectual property to compete with us. Although there will be license fees and royalties associated with the adopters agreements, there can be no assurance that such license fees and royalties will adequately compensate us for having to license our intellectual property. Fees and royalties received during the early years of adoption will be used to cover costs we incur to promote the HDMI standard and to develop and perform interoperability tests; in addition, after an initial period, the HDMI founders may reallocate the license fees and royalties amongst themselves to reflect each founder’s relative contribution of intellectual property to the HDMI specification.

Our success depends on managing our relationship with Intel.

Intel has a dominant role in many of the markets in which we compete, such as PCs and storage, and is a growing presence in the CE market. We have a multi-faceted relationship with Intel that is complex and requires significant management attention, including:

	•		Intel has been an investor of ours;

	•		Intel and we have been parties to business cooperation agreements;

	•		Intel and we are parties to a patent cross-license;

	•		Intel and we worked together to develop HDCP;

	•		an Intel subsidiary has the exclusive right to license HDCP, of which we are a licensee;

	•		Intel and we were two of the promoters of the Digital Display Working Group (DDWG);

	•		Intel is a promoter of the serial ATA working group, of which we are a contributor;

	•		Intel is a supplier to us and a customer for our products;

	•		we believe that Intel has the market presence to drive adoption of serial ATA by making them widely available in its chipsets and motherboards, which could affect demand for our products;

	•		we believe that Intel has the market presence to affect adoption of HDMI by either endorsing complementary technology or promulgating a competing standard, which could affect demand for our products;

	•		Intel may potentially integrate the functionality of our products, including Fibre Channel, Serial ATA, DVI, or HDMI into its own chips and chipsets, thereby displacing demand for some of our products;

	•		Intel may design new technologies that would require us to re-design our products for compatibility, thus increasing our R&D expense and reducing our revenue;

	•		Intel’s technology, including its 845G chipset, may lower barriers to entry for other parties who may enter the market and compete with us; and

	•		Intel may enter into or continue relationships with our competitors that can put us at a relative disadvantage.

Our cooperation and competition with Intel can lead to positive benefits, if managed effectively. If our relationship with Intel is not managed effectively, it could seriously harm our business, negatively affect our revenue, and increase our operating expenses.

We have granted Intel rights with respect to our intellectual property, which could allow Intel to develop products that compete with ours or otherwise reduce the value of our intellectual property.

We entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use the patents filed by the grantor prior to a specified date, except for identified types of products. We believe that the scope of our license to Intel excludes our current products and anticipated future products. Intel could, however, exercise its rights under this agreement to use our patents to develop and market other products that compete with ours, without payment to us. Additionally, Intel’s rights to our patents could reduce the value of our patents to any third-party who otherwise might be interested in acquiring rights to use our patents in

such products. Finally, Intel could endorse competing products, including a competing digital interface, or develop its own proprietary digital interface. Any of these actions could substantially harm our business and results of operations.

We are and may continue to become the target of securities class action suits and derivative suits which could result in substantial costs and divert management attention and resources.

Securities class action suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management. We and certain of our officers and directors, together with certain investment banks, have been named as defendants in a securities class action suit filed against us on behalf of purchasers of our securities between October 5, 1999 and December 6, 2000. It is alleged that the prospectus related to our initial public offering was misleading because it failed to disclose that the underwriters of our initial public offering had solicited and received excessive commissions from certain investors in exchange for agreements by investors to buy our shares in the aftermarket for predetermined prices. Due to inherent uncertainties in litigation, we cannot accurately predict the outcome of this litigation; however, a proposed settlement has been negotiated and has received preliminary approval by the Court. This settlement will not require Silicon Image to pay any settlement amounts nor issue any securities. In the event that the settlement is not granted final approval, we believe that these claims are without merit and we intend to defend vigorously against them. We and certain of our officers, together with certain investment banks and their current or former employees, were named as defendants in a securities class action suit filed against us on behalf of a putative class of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The lawsuit alleges that Silicon Image and certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image’s stock through the dissemination of allegedly false analysts’ reports. The plaintiff in this matter has filed an amended complaint in which Silicon Image, and the named officers, were dropped as defendants. We believe that the settlement described above, if approved, would encompass the claims in this case. We believe that these claims were without merit and, if revived, and not subject to the settlement, we intend to defend vigorously against them.

Silicon Image and certain of its officers were named as defendants in a securities class action litigation captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus, No. C05 00456 MMC”, commenced on January 31, 2005 and pending in the United States District Court for the Northern District of California. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleges that Silicon Image and certain of its officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On April 27, 2005, the Court issued an order appointing lead plaintiffs and approving the selection of lead counsel. On July 27, 2005, plaintiffs filed an amended consolidated complaint. The amended complaint no longer names Mr. Gargus as an individual defendant, but adds David Lee as an individual defendant. In accordance with the court’s scheduling order, the defendants filed a motion to dismiss on September 26, 2005, which motion is scheduled to be heard on January 13, 2006. Silicon Image intends to defend itself vigorously in this matter.

We are currently engaged in intellectual property litigation that is time-consuming and expensive to prosecute. We may become engaged in additional intellectual property litigation that could be time- consuming, may be expensive to prosecute or defend, and could adversely affect our ability to sell our product.

In recent years, there has been significant litigation in the United States and in other jurisdictions involving patents and other intellectual property rights. This litigation is particularly prevalent in the semiconductor industry, in which a number of companies aggressively use their patent portfolios to bring infringement claims. In addition, in recent years, there has been an increase in the filing of so-called “nuisance suits,” alleging infringement of intellectual property rights. These claims may be asserted as counterclaims in response to claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to quickly dispose of such suits, regardless of merit. In addition, as is common in the semiconductor industry, from time to time we have been notified that we may be infringing certain patents or other intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. As each claim is evaluated, we may consider the desirability of entering into settlement or licensing agreements. No assurance can be given that settlements will occur or that licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay damages or royalties to a third-party, and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

On April 24, 2001, we filed suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis Microchip, Inc. (collectively, “Genesis”) for infringement of our U.S. patent number 5,905,769 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the “Federal Suit”). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the importation of articles infringing our patent (the “ITC investigation”). The actions sought injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on February 7, 2002. We filed an amended complaint in the Federal Suit as of February 28, 2002, adding a claim for infringement of our U.S. patent number 5,974,464. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court did not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims, which the Court granted with prejudice on August 6, 2002. In December 2002, the parties entered into a memorandum of understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court, it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made certain cash payments to the Court, it has not made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On August 26, 2004, the parties completed the filing of their respective appeal briefs. After a hearing, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the lower court’s order, which was based on the parties’ agreement to settle the case, was not “final” and appealable. The case was remanded by the Federal Circuit back to the lower court. The parties have negotiated a stipulation by which the lower court can issue a new final judgment. Under this stipulation, the Court will turn over funds deposited by Genesis to us. On July 19, 2005 the Court sent $6.8 million to Silicon Image, which we have deposited in a segregated account and will not use until Genesis has exhausted all of its appeals. On July 22, 2005, Silicon Image filed a certification with the Court stating that the funds had been received by Silicon Image. On the same day, the Court issued an order dismissing Silicon Image’s lawsuit. Genesis filed a notice of appeal on August 16, 2005 and filed its opening appeal brief on October 24, 2005. Silicon Image has 40 days to file its opposition brief and Genesis will have 14 days from the filing of Silicon Image’s opposition brief to file a reply brief. After the conclusion of the briefing, the Federal Circuit will set a date for oral arguments and will notify the parties of the date.

Any potential intellectual property litigation against us could also force us to do one or more of the following:

	•		stop selling products or using technology that contains the allegedly infringing intellectual property;

	•		attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable terms or at all; and

	•		attempt to redesign products that contain the allegedly infringing intellectual property.

If we take any of these actions, we may be unable to manufacture and sell our products. We may be exposed to liability for monetary damages, the extent of which would be very difficult to accurately predict. In addition, we may be exposed to customer claims, for potential indemnity obligations, and to customer dissatisfaction and a discontinuance of purchases of our products while the litigation is pending. Any of these consequences could substantially harm our business and results of operations.

We have entered into, and may again be required to enter into, patent or other intellectual property cross-licenses.

Many companies have significant patent portfolios or key specific patents, or other intellectual property in areas in which we compete. Many of these companies appear to have policies of imposing cross-licenses on other participants in their markets, which may include areas in which we compete. As a result, we have been required, either under pressure of litigation or by significant vendors or customers, to enter into cross licenses or non-assertion agreements relating to patents or other intellectual property. This permits the cross-licensee, or beneficiary of a non-assertion agreement, to use certain or all of our patents and/or certain other intellectual property for free to compete with us.

We must attract and retain qualified personnel to be successful, and competition for qualified personnel is increasing in our market.

Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace. The loss of one or more of these employees could harm our business. Although we have entered into a limited number of employment contracts with certain executive officers, we generally do not have employment contracts with our key employees. We do not have key person life insurance for any of our key personnel. Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our location. This makes it difficult to retain our key personnel and to recruit highly qualified personnel. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees. Replacing departing executive officers and key employees can involve organizational disruption and uncertain timing.

The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our business. In addition, regulations adopted by The NASDAQ National Market requiring shareholder approval for all stock option plans, as well as regulations adopted by the New York Stock Exchange prohibiting NYSE member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future. In addition, a new accounting pronouncement, which comes into effect on January 1, 2006, will require us to record compensation expense for options granted to employees. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business.

We use contractors to provide services to the Company, which often involves contractual complexity, tax and employment law compliance, and being subject to audits and other governmental actions. We have been audited for our contracting policies in the past, and may be in the future. Burdening our ability to freely use contractors to provide services to the Company may increase the expense of obtaining such services, and/or require us to discontinue using contractors and attempt to find, interview, and hire employees to provide similar services. Such potential employees may not be available in a reasonable time, or at all, or may not be hired without undue cost.

We have experienced transitions in our management team, our board of directors and our independent registered public accounting firm in the past and may continue to do so in the future.

We have experienced a number of transitions with respect to our board of directors, executive officers, and our independent registered public accounting firm in recent quarters, including the following:

	•		In April 2004, Steve Tirado moved from the position of president and Chief Operating Officer to division president of storage group, Jaime Garcia-Meza moved from the position of vice president of worldwide sales to vice president of sales and marketing for storage platforms, Rob Valiton was appointed as vice president of worldwide sales, and Chris Paisley was appointed to the board of directors

	•		In August 2004, we announced that Robert C. Gargus planned to retire from the position of chief financial officer and Dale Brown, the controller, was appointed as chief accounting officer.

	•		In September 2004, Parviz Khodi, the vice president, PC/display products, passed away unexpectedly and his duties were subsequently assumed by John LeMoncheck, the vice president, CE products and Patrick Reutens was appointed as chief legal officer.

	•		In November 2004, David Lee resigned from the positions of chief executive officer and president, Steve Laub was appointed as chief executive officer and president and to the board of directors as well, and Andrew Rappaport and Douglas Spreng resigned from the board of directors.

	•		In January 2005, Steve Laub resigned from the positions of chief executive officer and president and from the board of directors, Steve Tirado was appointed as chief executive officer and president and to the board as well, and Chris Paisley was appointed chairman of the board of directors.

	•		In February 2005, Jaime Garcia-Meza was appointed as vice president of our storage business.

	•		In April 2005, Robert C. Gargus retired from the position of chief financial officer and Darrel Slack was appointed as his successor.

	•		In April 2005, four of our independent outside directors, David Courtney (Chairman of the Audit Committee), Keith McAuliffe, Chris Paisley (Chairman of the Board) and Richard Sanquini, resigned from our Board of Directors and Board committees.

	•		In April 2005, Darrel Slack, our chief financial officer, was elected to our Board of Directors.

	•		In May 2005, Masood Jabbar and Peter Hanelt were elected to our Board of Directors.

	•		In June 2005, David Lee did not stand for re-election at our annual meeting of stockholders, and accordingly, Dr. Lee resigned from our Board of Directors.

	•		In June 2005, Pricewaterhouse Coopers LLP, our independent accountant, resigned as our auditor. In July 2005, we appointed Deloitte & Touche LLP as our new independent auditor.

	•		In August 2005, Darrel Slack began a personal leave of absence.

	•		In August 2005, Dale Brown resigned from the positions of chief accounting officer and corporate controller.

	•		In August 2005, Robert Freeman was appointed as interim chief financial officer and chief accounting officer .

	•		In September 2005, Darrel Slack resigned from the position of chief financial officer and from our Board of Directors and the Board of Directors of HDMI Licensing, LLC, our wholly-owned subsidiary.

	•		In October 2005, William George was elected to our Board of Directors.

	•		In October 2005, Robert Bagheri resigned from the position of executive vice president of operations.

	•		In October 2005, Ahmad Ghaemmaghami was appointed as interim executive vice president of operations.

	•		In October 2005, John LeMoncheck, vice president, consumer electronics and PC/display, left the company.

	•		In October 2005, John Shin was appointed as interim vice president, consumer electronics and PC/display.

	•		In November 2005, Robert Freeman’s position changed from interim chief financial officer to chief financial officer.

Such past and future transitions may continue to result in disruptions in our operations and require additional costs.

Industry cycles may strain our management and resources.

Cycles of growth and contraction in our industry may strain our management and resources. To manage these industry cycles effectively, we must:

	•		improve operational and financial systems;

	•		train and manage our employee base;

	•		successfully integrate operations and employees of businesses we acquire or have acquired;

	•		attract, develop, motivate and retain qualified personnel with relevant experience; and

	•		adjust spending levels according to prevailing market conditions.

If we cannot manage industry cycles effectively, our business could be seriously harmed.

Our operations and the operations of our significant customers, third-party wafer foundries and third-party assembly and test subcontractors are located in areas susceptible to natural disasters.

Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes, and the operations of CMD, which we acquired, are based in the Los Angeles area, which is also susceptible to earthquakes. TSMC, the outside foundry that produces the majority of our semiconductor products, is located in Taiwan. Advanced Semiconductor Engineering, or ASE, one of the subcontractors that assembles and tests our semiconductor products, is also located in Taiwan.

Both Taiwan and Japan are susceptible to earthquakes, typhoons and other natural disasters.

Our business would be negatively affected if any of the following occurred:

	•		an earthquake or other disaster in the San Francisco Bay Area or the Los Angeles area damaged our facilities or disrupted the supply of water or electricity to our headquarters or our Irvine facility;

	•		an earthquake, typhoon or other disaster in Taiwan or Japan resulted in shortages of water, electricity or transportation, limiting the production capacity of our outside foundries or the ability of ASE to provide assembly and test services;

	•		an earthquake, typhoon or other disaster in Taiwan or Japan damaged the facilities or equipment of our customers and distributors, resulting in reduced purchases of our products; or

	•		an earthquake, typhoon or other disaster in Taiwan or Japan disrupted the operations of suppliers to our Taiwanese or Japanese customers, outside foundries or ASE, which in turn disrupted the operations of these customers, foundries or ASE and resulted in reduced purchases of our products or shortages in our product supply.

Changes in environmental rules and regulations could increase our costs and reduce our revenue.

Several jurisdictions are considering whether to implement rules that would require that certain products, including semiconductors, be made lead-free. We anticipate that some jurisdictions may finalize and enact such requirements. Some jurisdictions are also considering whether to require abatement or disposal obligations for products made prior to the enactment of any such rules. Although several of our products are available to customers in a lead-free condition, most of our products are not lead-free. Any requirement that would prevent or burden the development, manufacture or sales of lead-containing semiconductors would likely reduce our revenue for such products and would require us to incur costs to develop substitute lead-free replacement products, which may take time and may not always be economically or technically feasible, and may require disposal of non-compliant inventory. In addition, any requirement to dispose or abate previously sold products would require us to incur the costs of setting up and implementing such a program.

Provisions of our charter documents and Delaware law could prevent or delay a change in control, and may reduce the market price of our common stock.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include:

•

authorizing the issuance of preferred stock without stockholder approval;

	•		providing for a classified board of directors with staggered, three-year terms;

	•		requiring advance notice of stockholder nominations for the board of directors;

	•		providing the board of directors the opportunity to expand the number of directors without notice to stockholders;

	•		prohibiting cumulative voting in the election of directors;

	•		requiring super-majority voting to amend some provisions of our certificate of incorporation and bylaws;

	•		limiting the persons who may call special meetings of stockholders; and

	•		prohibiting stockholder actions by written consent.

Provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us.

The price of our stock fluctuates substantially and may continue to do so.

The stock market has experienced extreme price and volume fluctuations that have affected the market valuation of many technology companies, including Silicon Image. These factors, as well as general economic and political conditions, may materially and adversely affect the market price of our common stock in the future. The market price of our common stock has fluctuated significantly and may continue to fluctuate in response to a number of factors, including, but not limited to:

	•		actual or anticipated changes in our operating results;

	•		changes in expectations of our future financial performance;

	•		changes in market valuations of comparable companies in our markets;

	•		changes in market valuations or expectations of future financial performance of our vendors or customers;

	•		changes in our key executives and technical personnel; and

	•		announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.

Due to these factors, the price of our stock may decline. In addition, the stock market experiences volatility that is often unrelated to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance.

Continued terrorist attacks or war could lead to further economic instability and adversely affect our operations, results of operations and stock price.

The United States has taken, and continues to take, military action against terrorism and has engaged in war with Iraq and currently has an occupation force there and in Afghanistan. In addition, the current nuclear arms crises in North Korea and Iran could escalate into armed hostilities or war. Acts of terrorism or armed hostilities may disrupt or result in instability in the general economy and financial markets and in consumer demand for the OEM’s products that incorporate our products. Disruptions and instability in the general economy could reduce demand for our products or disrupt the operations of our customers, suppliers, distributors and contractors, many of whom are located in Asia, which would in turn adversely affect our operations and results of operations. Disruptions and instability in financial markets could adversely affect our stock price. Armed hostilities or war in South Korea could disrupt the operations of the research and development contractors we utilize there, which would adversely affect our research and development capabilities and ability to timely develop and introduce new products and product improvements.

We indemnify certain of our licensing customers against infringement.

We indemnify certain of our licensing agreements customers for any expenses or liabilities resulting from third-party claims of infringements of patent, trademark, trade secret, or copyright rights by the technology we license. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to any

claim. In the event that we were required to defend any lawsuits with respect to our indemnification obligations, or to pay any claim, our results of operations could be materially adversely affected.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our cash equivalents and short-term investments consist primarily of fixed-income securities that are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of our cash equivalents and short-term investments, an immediate 10% change in interest rates would not be expected to have a material effect on our near-term results of operations or financial condition. Our long-term capital lease obligations bear interest at fixed rates; therefore, our results of operations would not be affected by immediate changes in interest rates. Also, components of our stock compensation expense are tied to our stock price. Changes in our stock price can have a significant affect on the amount recorded as stock compensation expense.

Foreign Currency Exchange Risk

All of our sales are denominated in U.S. dollars, and substantially all of our expenses are incurred in U.S. dollars, thus limiting our exposure to foreign currency exchange risk. We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use derivative financial instruments for trading or speculative purposes. The effect of an immediate 10% change in foreign currency exchange rates should not have a material effect on our future operating results or cash flows; however, a long term change in foreign currency rates would likely result in increased wafer, packaging, assembly or testing costs.

Item 4. Controls and Procedures

(a) Evaluation of Controls and Procedures. For the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were ineffective as of the end of the period covered by this report due solely to the assessment of the material weakness described below.

(b) Changes in Internal Controls. There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules13a-15(f) under the Securities Exchange Act of 1934, as amended) during the third quarter of our 2005 fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except as described below.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

On April 25, 2005, four of the five independent members of our board of directors resigned, leaving our audit committee with only one member, who was not a financial expert as defined by Nasdaq or an “audit committee financial expert” as defined by the rules of the SEC. Due to the vacancies on the board and its audit committee created by these resignations, we failed to comply with the Marketplace Rules of Nasdaq and rules of the Securities and Exchange Commission (“SEC”) requiring that the audit committee consist of three independent directors and that one of the three audit committee members meet the financial sophistication requirement of the Marketplace Rules and be a “audit committee financial expert”, as defined by the rules of the SEC. The fact that our Audit Committee consisted of only one member, who is not a financial expert as defined by Nasdaq or an “audit committee financial expert” as defined by the rules of the SEC, limited the ability of the audit committee to provide effective oversight over our internal control over financial reporting and the preparation of our financial statements for external purposes in accordance with Generally Accepted Accounting Principles (GAAP). Accordingly, management concluded that this control deficiency constituted a material weakness.

Effective as of May 15, 2005, our board of directors elected Masood Jabbar as a new member of the board, and effective as of May 18, 2005, our board of directors elected Peter Hanelt as a new member of the board. Mr. Jabbar and Mr. Hanelt both became members of the audit committee, and Mr. Hanelt was appointed chairman of the audit committee. As a result, our audit committee now complies with the marketplace rules of the NASDAQ Stock Market, Inc. and rules of the Securities and Exchange Commission requiring that the audit committee consist of three independent directors and that one of the three audit committee members meet the financial sophistication requirement of the Marketplace Rules and be a “audit committee financial expert”, as defined by the rules of the SEC. We believe that remediation of this material weakness will be completed once sufficient time has elapsed for the board of directors to evaluate the effectiveness of our newly constituted audit committee.

Notwithstanding the existence of the material weakness in internal control over financial reporting described below, management has concluded that the consolidated financial statements in this Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the period presented.

As of September 30, 2005, the Company did not maintain effective controls over the valuation and determination of its deferred tax assets and income tax provision. Specifically, the Company did not maintain effective controls to ensure that the valuation of deferred tax assets, including any associated valuation allowance, was determined based upon appropriate supporting documentation. Management has determined that this control deficiency represents a material weakness.

The material weakness is the result of significant turnover in the financial management of the Company, including the resignations of the Company’s Chief Financial Officer and Chief Accounting Officer during the quarter ended September 30, 2005. The Company named Robert Freeman as Interim Chief Financial Officer August 22, 2005 and named him permanent Chief Financial Officer on November 8, 2005.

The Company is in the process of designing and implementing improvements in its internal control over financial reporting to address the material weakness described above. These improvements include implementation of a new internal control process regarding the valuation of certain assets to support the Company’s valuation and determination of its deferred tax assets and income tax provision.

Other than the foregoing, there were no other changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

we would proceed directly in the Federal Suit. Our motion to dismiss was granted on February 7, 2002. We filed an amended complaint in the Federal Suit as of February 28, 2002, adding a claim for infringement of our U.S. patent number 5,974,464. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court did not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims, which the Court granted with prejudice on August 6, 2002. In December 2002, the parties entered into a memorandum of understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court, it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made certain cash payments to the Court, it has not made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On August 26, 2004, the parties completed the filing of their respective appeal briefs. After a hearing, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the lower court’s order, which was based on the parties’ agreement to settle the case, was not “final” and appealable. The case was remanded by the Federal Circuit back to the lower court. The parties have negotiated a stipulation by which the lower court can issue a new final judgment. Under this stipulation, the Court will turn over funds deposited by Genesis to us. On July 19, 2005 the Court sent $6.8 million to Silicon Image, which we have deposited in a segregated account and will not use until Genesis has exhausted all of its appeals. On July 22, 2005, Silicon Image filed a certification with the Court stating that the funds had been received by Silicon Image. On the same day, the Court issued an order dismissing Silicon Image’s lawsuit. Genesis filed a notice of appeal on August 16, 2005 and filed its opening appeal brief on October 24, 2005. Silicon Image has 40 days to file its opposition brief and Genesis will have 14 days from the filing of Silicon Image’s opposition brief to file a reply brief. After the conclusion of the briefing, the Federal Circuit will set a date for oral arguments and will notify the parties of the date.

Silicon Image, certain officers and directors, and Silicon Image’s underwriters have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et al., No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New York. The lawsuit alleges that all defendants were part of a scheme to manipulate the price of Silicon Image’s stock in the aftermarket following Silicon Image’s initial public offering in October 1999. Response to the complaint and discovery in this action on behalf of Silicon Image and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over 300 such cases brought by plaintiffs in the Southern District of New York. Pursuant to a tolling agreement, individual defendants have been dropped from the suit for the time being. In February 2003, the Court denied motions to dismiss brought by the underwriters and certain issuers and ordered that the case may proceed against certain issuers including against Silicon Image. A proposed settlement has been negotiated and has received preliminary approval by the Court. In the event that the settlement is granted final approval, we do not expect it to have a material effect on our results of operations or financial position. In the event that the settlement is not finally approved, we could not accurately predict the outcome of the litigation, but we intend to defend this matter vigorously.

its officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On April 27, 2005, the Court issued an order appointing lead plaintiffs and approving the selection of lead counsel. On July 27, 2005, plaintiffs filed an amended consolidated complaint. The amended complaint no longer names Mr. Gargus as an individual defendant, but adds David Lee as an individual defendant. In accordance with the court’s scheduling order, the defendants filed a motion to dismiss on September 26, 2005, which motion is scheduled to be heard on January 13, 2006. Silicon Image intends to defend itself vigorously in this matter.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits


(a) Exhibits
10.01		Silicon Image, Inc. Bonus Plan for Fiscal Year 2005 (as amended) (incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K (File No. 000-26887) filed July 25, 2005)

10.02		Employment Offer Letter between Robert Freeman and the Registrant dated August 18, 2005.

10.03		1999 Equity Incentive Plan, as amended through April 5, 2005.

31.01		Certification under Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certification under Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.02		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dated: November 9, 2005		Silicon Image, Inc.

		/s/ Robert R Freeman

		Robert R Freeman
		Chief Financial Officer (Principal Financial Officer)

Exhibit Index


10.01		Silicon Image, Inc. Bonus Plan for Fiscal Year 2005 (as amended) (incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K (File No. 000-26887) filed July 25, 2005)

10.02		Employment Offer Letter between Robert Freeman and the Registrant dated August 18, 2005.

10.03		1999 Equity Incentive Plan, as amended through April 5, 2005.

31.01		Certification under Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certification under Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.02		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.02 2 f13427exv10w02.htm EXHIBIT 10.02 exv10w02

Exhibit 10.02

August 18, 2005

Robert Freeman

Dear Robert,

Silicon Image, Inc. (the “Company”) is pleased to confirm our employment offer to you as specified herein with a start date of August 22, 2005. The terms of our offer and the benefits currently provided by the Company are as follows:

As you are aware the Company’s current Chief Financial Officer is on a leave of absence and you are being hired to be the Company’s Interim Chief Financial Officer during his absence. As Interim Chief Financial Officer you will report to Steve Tirado, the Company’s Chief Executive Officer, and will be responsible for exercising the duties and responsibilities typically associated with a public company Chief Financial Officer, including participating in the Company’s internal management certification process, and the preparation and certification of the Company’s SEC financial reports.

Your total cash compensation will be $30,000.00 per month. In addition, you will be eligible to participate in regular health insurance and other employee benefit plans established by the Company for its employees from time to time.

As an employee of the Company you will have access to certain Company confidential information and you may, during the course of your employment, develop certain information or inventions which will be the property of the Company. During the period that you render services to the Company, you agree to not engage in any employment, business or activity that is in any way competitive with the business or proposed business of the Company. You will disclose to the Company in writing any other gainful employment, business or activity that you are currently associated with or participate in that competes with the Company. To protect the interest of the Company, you will need to sign the Company’s standard “Employee Inventions and Confidentiality Agreement” as a condition of your employment. We wish to impress upon you that we do not wish you to bring any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employer. You represent that your signing of this offer letter, agreement(s) concerning stock options granted to you under the Plan (as defined below) and the Company’s Employee Invention Assignment and Confidentiality Agreement and your commencement of employment with the Company will not violate any agreement currently in place between yourself and current or past employers.

This offer of employment is made to you in confidence, and we ask that you not disclose its terms to anyone outside your immediate family. If you do disclose any of its terms to such a

family member, please caution him or her that such information is confidential and must not be disclosed to anyone.

Should you decide to accept our offer, you will be an at-will employee of the Company, which means the employment relationship can be terminated by either of us for any reason or no reason, at any time and without notice, however if the Company terminates you without cause before November 22, 2005 you shall be entitled to receive the compensation set forth in Section 2 through November 22, 2005. Any statements or representations to the contrary (and, indeed, any statements contradicting any provision in this letter) should be regarded by you as ineffective. Further, your participation in any benefit program is not to be regarded as assuring you of continuing employment for any particular period of time.

Please note that because of employer regulations adopted in the Immigration Reform and Control Act of 1986, within three business days of starting your new position you will need to present documentation demonstrating that you have authorization to work in the United States. If you have questions about this requirement, which applies to U.S. citizens and non-U.S. citizens alike, you may contact our Human Resource department.

Please also note that due to United States export control laws, the Company may need to make inquiries into your citizenship if you will have probable or actual contact with certain technology and/or source code. Should the Company determine that you will have probable or actual contact with certain technology and/or source code, and should you be a citizen of an embargoed country under United States export control laws, this may have a material effect on the terms and conditions of your employment with the Company.

You and the Company agree to submit to mandatory and exclusive binding arbitration any controversy or claim arising out of, or relating to, this Agreement or any breach hereof, provided, however, that the parties retain their right to, and shall not be prohibited, limited or in any other way restricted from, seeking or obtaining equitable relief from a court having jurisdiction over the parties. Such arbitration shall be conducted through the American Arbitration Association in the State of California, Santa Clara County, before a single arbitrator, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association in effect at that time. The arbitrator must decide all disputes in accordance with California law and shall have power to decide all matters, including arbitrability. You will bear only those costs of arbitration you would otherwise bear had you brought a covered claim in court. When the arbitrator has issued a decision, judgment on that decision may be entered in any court having jurisdiction thereof. We each understand and agree that we are waiving a trial by jury.

This offer will remain valid until Thursday August 18, 2005. If you decide to accept our offer please sign the enclosed copy of this letter in the space indicated and return it to the Human Resource department. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this offer and the attached documents. Should you have anything else that you wish to discuss, please do not hesitate to call.

We look forward to the opportunity to welcome you to Silicon Image, Inc.

Sincerely,

Steve Tirado
Chief Executive Officer

My signature below indicates acceptance of the terms and conditions of this offer and acknowledgement that I have read and understood the terms and conditions of this offer.


/s/ Robert Freeman	August 18, 2005	August 18, 2005

Robert Freeman	Date	Start Date

EX-10.03 3 f13427exv10w03.htm EXHIBIT 10.03 exv10w03

Exhibit 10.03

SILICON IMAGE, INC.

1999 EQUITY INCENTIVE PLAN

Adopted July 20, 1999
As Amended March 29, 2001
As Amended and Restated May 20, 2003
As Amended and Restated April 5, 2005

1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company’s future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23.

2. SHARES SUBJECT TO THE PLAN.

2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 2,000,000 Shares plus Shares that are subject to: (a) issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; and (c) an Award that otherwise terminates without Shares being issued. In addition, any authorized shares not issued or subject to outstanding grants under the Silicon Image, Inc. 1995 Equity Incentive Plan (the “Prior Plan”) on the Effective Date (as defined below) and any shares issued under the Prior Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options granted pursuant to the Prior Plan that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for grant and issuance under the Prior Plan, but will be available for grant and issuance under this Plan. In addition, on the first business day of each calendar year of the Company during the term of the Plan, the aggregate number of Shares reserved and available for grant and issuance pursuant to this Plan will be increased automatically by a number of Shares equal to 5% of the total outstanding shares of the Company, provided, that the Board or the Committee may in its sole discretion reduce the amount of the increase in any particular year; and, provided further, that no more than 10,000,000 shares shall qualify as ISOs (as defined in Section 5 below). At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan.

2.2 Adjustment of Shares. In the event that the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Share amounts set forth in Section 3 below, (c) the number of Shares subject to each Annual Grant described in Section 9 below, (d) the Exercise Prices of and number of Shares subject to outstanding Options, and (e) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee.

3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company; provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No person will be eligible to receive more than 500,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder, other than new employees of the Company or of a Parent or

Silicon Image, Inc.
Amended and Restated
1999 Equity Incentive Plan

Subsidiary of the Company (including new employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company), who are eligible to receive up to a maximum of 750,000 Shares in the calendar year in which they commence their employment. A person may be granted more than one Award under this Plan.

4. ADMINISTRATION.

4.1 Committee Authority. This Plan will be administered by the Committee or by the Board acting as the Committee. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, and subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, the Committee will have the authority to:

(a)

construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;

(b)

prescribe, amend and rescind rules and regulations relating to this Plan or any Award;

(c)

select persons to receive Awards;

(d)

determine the form and terms of Awards;

(e)

determine the number of Shares or other consideration subject to Awards;

(f)

determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;

(g)

grant waivers of Plan or Award conditions;

(h)

determine the vesting, exercisability and payment of Awards;

(i)

correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;

(j)

determine whether an Award has been earned; and

(k)

make all other determinations necessary or advisable for the administration of this Plan.

4.2 Committee Discretion. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company.

5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code (“ISO”) or Nonqualified Stock Options (“NQSOs”), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following:

5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO (“Stock Option Agreement”), and, except as otherwise required by the terms of Section 9 hereof, will be in such form and contain such provisions

Silicon Image, Inc.
Amended and Restated
1999 Equity Incentive Plan

(which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan.

5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option.

5.3 Exercise Period. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company (“Ten Percent Stockholder”) will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines.

5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan.

5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the “Exercise Agreement”) in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant’s investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased.

5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following:

(a)

If the Participant is Terminated for any reason except death or Disability, then the Participant may exercise such Participant’s Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options.

(b)

If the Participant is Terminated because of Participant’s death or Disability (or the Participant dies within three (3) months after a Termination other than for Cause or because of Participant’s Disability), then Participant’s Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant’s legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination

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is for any reason other than the Participant’s death or Disability, or (b) twelve (12) months after the Termination Date when the Termination is for Participant’s death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options.

5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable.

5.8 Limitations on ISO. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.

5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant’s rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price.

5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.

6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price”), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following:

6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement (“Restricted Stock Purchase Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant’s execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee.

6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee on the date the Restricted Stock Award is granted, except in the case of

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a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan.

6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall be subject to such restrictions as the Committee may impose. These restrictions may be based upon completion of a specified number of years of service with the Company or upon completion of the performance goals as set out in advance in the Participant’s individual Restricted Stock Purchase Agreement. Restricted Stock Awards may vary from Participant to Participant and between groups of Participants. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Restricted Stock Award, the Committee shall determine the extent to which such Restricted Stock Award has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Restricted Stock Awards that are subject to different Performance Periods and having different performance goals and other criteria.

6.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Restricted Stock Award only to the extent earned as of the date of Termination in accordance with the Restricted Stock Purchase Agreement, unless the Committee will determine otherwise.

7. STOCK BONUSES.

7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent or Subsidiary of the Company pursuant to an Award Agreement (the “Stock Bonus Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant’s individual Award Agreement (the “Performance Stock Bonus Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine.

7.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Stock Bonus, the Committee shall determine the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.

7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may

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be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine.

8. PAYMENT FOR SHARE PURCHASES.

8.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law:

(a)

by cancellation of indebtedness of the Company to the Participant;

(b)

by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market;

(c)

by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares;

(d)

by waiver of compensation due or accrued to the Participant for services rendered;

(e)

with respect only to purchases upon exercise of an Option, and provided that a public market for the Company’s stock exists:

(1)

through a “same day sale” commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an “NASD Dealer”) whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or

(2)

through a “margin” commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or

(f)

by any combination of the foregoing.

8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant.

9. AUTOMATIC GRANTS TO ELIGIBLE DIRECTORS.

9.1 Types of Options and Shares. Options granted under this Plan and subject to this Section 9 shall be NQSOs.

9.2 Eligibility. Options subject to this Section 9 shall be granted only to Eligible Directors.

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9.3 Annual Grants. Immediately following each annual meeting of stockholders, (a) each Eligible Director will automatically be granted an Option for 20,000 Shares, provided the Eligible Director is a member of the Board on such date and has served continuously as a member of the Board of Directors of the Company for a period of at least one year since the date when such Eligible Director first became a member of the Board; (b) each Eligible Director who is a member of a standing committee of the Board will automatically be granted an Option for an additional 5,000 Shares for each such committee on which such Eligible Director serves, provided such Eligible Director is a member of such committee on such date and has served continuously as a member of such committee of the Company for a period of at least one year since the date when such Eligible Director first joined such committee; and (c) if the Chairperson of the Board is an Eligible Director, the Chairperson of the Board will automatically be granted an Option for an additional 5,000 shares, provided he or she is serving as Chairperson of the Board on such date and has served continuously as Chairperson of the Board of the Company for a period of at least one year since the date when such Eligible Director first became Chairperson of the Board. The Options described in this Section 9.3 are referred to as the “Annual Grants.”

9.4 Exercise Price; Vesting; Exercise Period. The exercise price of an Annual Grant shall be the Fair Market Value of the Shares at the time of grant. Provided the director continues to provide services to the Company, an Annual Grant shall become vested and exercisable with respect to one twenty-fourth (1/24) of the Shares each month following the date of grant until fully vested; provided, however, that an Annual Grant shall become fully vested immediately prior to the consummation of a Change in Control. The Exercise Period of an Annual Grant shall end five (5) years after the date of grant.

10. WITHHOLDING TAXES.

10.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.

10.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and be in writing in a form acceptable to the Committee

11. TRANSFERABILITY.

11.1 Except as otherwise provided in this Section 11, Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as determined by the Committee and set forth in the Award Agreement with respect to Awards that are not ISOs.

11.2 All Awards other than NQSO’s. All Awards other than NQSO’s shall be exercisable: (i) during the Participant’s lifetime, only by (A) the Participant, or (B) the Participant’s guardian or legal representative; and (ii) after Participant’s death, by the legal representative of the Participant’s heirs or legatees.

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11.3 NQSOs. Unless otherwise restricted by the Committee, an NQSO shall be exercisable: (i) during the Participant’s lifetime only by (A) the Participant, (B) the Participant’s guardian or legal representative, (C) a Family Member of the Participant who has acquired the NQSO by “permitted transfer;” and (ii) after Participant’s death, by the legal representative of the Participant’s heirs or legatees. “Permitted transfer” means, as authorized by this Plan and the Committee in an NQSO, any transfer effected by the Participant during the Participant’s lifetime of an interest in such NQSO but only such transfers which are by gift or domestic relations order. A permitted transfer does not include any transfer for value and neither of the following are transfers for value: (a) a transfer of under a domestic relations order in settlement of marital property rights or (b) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members or the Participant in exchange for an interest in that entity.

12. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES..

12.1 Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant’s Purchase Price or Exercise Price pursuant to Section 12.

12.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant’s purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information.

12.3 Restrictions on Shares. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all Unvested Shares held by a Participant following such Participant’s Termination at any time within ninety (90) days after the later of Participant’s Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant’s Exercise Price or Purchase Price, as the case may be.

13. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted.

14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant’s Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant’s obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory

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note notwithstanding any pledge of the Participant’s Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid.

15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree.

16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.

17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant’s employment or other relationship at any time, with or without cause.

18. CORPORATE TRANSACTIONS.

18.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (d) the sale of substantially all of the assets of the Company, or (e) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards (including without limitation Annual Grants under Section 9) may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 18.1, such Awards (including without limitation Annual Grants under Section 9) will expire on such transaction at such time and on such conditions as the Committee will

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determine. Notwithstanding anything in this Plan to the contrary, the Committee may, in its sole discretion, provide that the vesting of any or all Awards granted pursuant to this Plan will accelerate upon a transaction described in this Section 18. If the Committee exercises such discretion with respect to Options, such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee.

18.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards (including without limitation Annual Grants under Section 9) will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.

18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company’s award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.

19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on the date on which the registration statement filed by the Company with the SEC under the Securities Act registering the initial public offering of the Company’s Common Stock is declared effective by the SEC (the “Effective Date”). This Plan shall be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Committee may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial stockholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the stockholders of the Company; (c) in the event that initial stockholder approval is not obtained within the time period provided herein, all Awards granted hereunder shall be cancelled, any Shares issued pursuant to any Awards shall be cancelled and any purchase of Shares issued hereunder shall be rescinded; and (d) in the event that stockholder approval of such increase is not obtained within the time period provided herein, all Awards granted pursuant to such increase will be cancelled, any Shares issued pursuant to any Award granted pursuant to such increase will be cancelled, and any purchase of Shares pursuant to such increase will be rescinded.

20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of stockholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California.

21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval.

22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements

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as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

23. DEFINITIONS. As used in this Plan, the following terms will have the following meanings:

"Award” means any award under this Plan, including any Option, Restricted Stock or Stock Bonus.

"Award Agreement” means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award.

"Board” means the Board of Directors of the Company.

"Cause” means the commission of an act of theft, embezzlement, fraud, dishonesty or a breach of fiduciary duty to the Company or a Parent or Subsidiary of the Company.

"Change of Control” means the consummation of any transaction or series of related transactions which results in all of the holders of record of the Company’s capital stock immediately prior to the transaction or transactions holding less than fifty percent (50%) of the voting power of the surviving entity in the transaction or transactions immediately after the transaction or transactions, including the acquisition of the Company by another entity and any reorganization, merger or consolidation, or which results in the sale of all or substantially all of the assets of the Company; provided, however, if the surviving entity in the transaction or transactions is wholly owned by another entity, then a Change of Control has occurred only if the holders of record of the Company’s capital stock immediately prior to the transaction or transactions hold less than fifty percent (50%) of the voting power of the other entity immediately after the transaction or transactions.

"Code” means the Internal Revenue Code of 1986, as amended.

"Committee” means the Compensation Committee of the Board.

"Company” means Silicon Image, Inc. or any successor corporation.

"Disability” means a disability, whether temporary or permanent, partial or total, as determined by the Committee. For ISO purposes, “Disability” means a disability within the meaning of Code Section 22(e)(3).

"Eligible Director” means a member of the Board (1) who is not an employee of the Company or any Parent, Subsidiary or Affiliate of the Company, and (2) whose direct pecuniary interest (as defined by the SEC in Rule 16a-1 promulgated under the Exchange Act) in the Company’s Common Stock is less than five percent (5%) of total shares of Common Stock outstanding.

"Exchange Act” means the Securities Exchange Act of 1934, as amended.

"Exercise Price” means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option.

"Fair Market Value” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

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(a)

if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal;

(b)

if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal;

(c)

if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal;

(d)

in the case of an Award made on the Effective Date, the price per share at which shares of the Company’s Common Stock are initially offered for sale to the public by the Company’s underwriters in the initial public offering of the Company’s Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or

(e)

if none of the foregoing is applicable, by the Committee in good faith.

Family Member” includes any of the following:

(a)

child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the Participant, including any such person with such relationship to the Participant by adoption;

(b)

any person (other than a tenant or employee) sharing the Participant’s household;

(c)

a trust in which the persons in (a) and (b) have more than fifty percent of the beneficial interest;

(d)

a foundation in which the persons in (a) and (b) or the Participant control the management of assets; or

(e)

any other entity in which the persons in (a) and (b) or the Participant own more than fifty percent of the voting interest.

"Insider” means an officer or director of the Company or any other person whose transactions in the Company’s Common Stock are subject to Section 16 of the Exchange Act.

"Option” means an award of an option to purchase Shares pursuant to Section 5.

"Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

"Participant” means a person who receives an Award under this Plan.

Silicon Image, Inc.
Amended and Restated
1999 Equity Incentive Plan

Performance Factors” means the factors selected by the Committee from among the following measures to determine whether the performance goals established by the Committee and applicable to Awards have been satisfied:

(a)

Net revenue and/or net revenue growth;

(b)

Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth;

(c)

Operating income and/or operating income growth;

(d)

Net income and/or net income growth;

(e)

Earnings per share and/or earnings per share growth;

(f)

Total stockholder return and/or total stockholder return growth;

(g)

Return on equity;

(h)

Operating cash flow return on income;

(i)

Adjusted operating cash flow return on income;

(j)

Economic value added; and

(k)

Individual confidential business objectives.

"Performance Period” means the period of service determined by the Committee, not to exceed five years, during which years of service or performance is to be measured for Restricted Stock Awards or Stock Bonuses.

"Plan” means this Silicon Image, Inc. 1999 Equity Incentive Plan, as amended from time to time.

"Restricted Stock Award” means an award of Shares pursuant to Section 6.

"SEC” means the Securities and Exchange Commission.

"Securities Act” means the Securities Act of 1933, as amended.

"Shares” means shares of the Company’s Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security.

"Stock Bonus” means an award of Shares, or cash in lieu of Shares, pursuant to Section 7.

"Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

"Termination” or “Terminated” means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director,

Silicon Image, Inc.
Amended and Restated
1999 Equity Incentive Plan

consultant, independent contractor, or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the “Termination Date”).

"Unvested Shares” means “Unvested Shares” as defined in the Award Agreement.

"Vested Shares” means “Vested Shares” as defined in the Award Agreement.

EX-31.01 4 f13427exv31w01.htm EXHIBIT 31.01 exv31w01

Certifications

Exhibit 31.01

Certification Under
Section 302 of the Sarbanes-Oxley Act of 2002

I, Steve Tirado, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Silicon Image, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2005



	/s/ Steve Tirado
	Steve Tirado
	President and Chief Executive Officer (Principal Executive Officer)

EX-31.02 5 f13427exv31w02.htm EXHIBIT 31.02 exv31w02

Exhibit 31.02

Certification Under
Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert R. Freeman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Silicon Image, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2005



	/s/ Robert R. Freeman
	Robert R. Freeman
	Chief Financial Officer (Principal Financial Officer)

EX-32.01 6 f13427exv32w01.htm EXHIBIT 32.01 exv32w01

Exhibit 32.01

Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Silicon Image, Inc (the “Company”) on Form 10-Q for the period ending September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steve Tirado, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	1)		The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

	2)		The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.



	/s/ Steve Tirado
	Steve Tirado
	President and Chief Executive Officer (Principal Executive Officer) November 9, 2005

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.02 7 f13427exv32w02.htm EXHIBIT 32.02 exv32w02

Exhibit 32.02

Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Silicon Image, Inc (the “Company”) on Form 10-Q for the period ending September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert R. Freeman, Interim Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	1)		The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

	2)		The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.



	/s/ Robert R. Freeman
	Robert R. Freeman
	Chief Financial Officer (Principal Financial Officer) November 9, 2005

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